In Focus

In Focus Pension Info

Everyone needs to plan for their retirement. People are living longer and healthier lives, so it's even more important to think about how and when to save for retirement and how long to continue working.

Pensions can be confusing and many people don't know where to begin, especially when there are so many other things to spend your money on. But the truth is that a pension is one of the most effective ways to save money because you can get tax relief on the money you save in a pension scheme.

So, with a bit of planning, you can do a lot to help yourself get ready for retirement. Fairly small changes now can make a big difference to your life in the future - and you don't need to blow your monthly budget.

This section will help you understand the basic facts you need to know about pensions, including:

• what is available to you from the State when you retire
• some of the financial choices you can make to prepare for your retirement
• practical and realistic steps you can take to help you save for your retirement

A note about the future

The Pensions Act, which became law on 26 July 2007, makes changes to the State Pensions system. In the main, these changes will only affect you if you reach State Pension age on or after 6 April 2010. These changes include:

• Introducing a new system of credits which will increase the number of people who would become entitled to a State Pension
• Increasing the basic State Pension by the rate of the increase in earnings from 2012 at the earliest and by the end of the next Parliament at the latest
• Increasing the State Pension age from 65 to 68 between 2024 and 2046
• Abolishing contracting out for defined contribution occupational pension schemes and personal pension schemes

HOW PENSIONS WORK

What is a pension?
Pensions are long-term investments with special tax rules - for example, you get tax relief on contributions.
You can't access the money in your pension until you reach age 50, going up to 55 by 2010. Some pension schemes have additional rules about when you can take your benefits - check with your scheme provider.
You'll need to ask your pension provider when they will increase the minimum age as they can do this at any time between April 2006 and April 2010. But you no longer have to stop working to draw a pension as long as your scheme's rules let you.

How does it work?
The way your pension works will depend on the type of pension you have.
There are three main types:

1. Occupational salary related schemes - (also known as defined benefit schemes) - offered by some employers
2. Occupational defined contributions schemes (also known as money purchase schemes) - also offered by some employers;
3. Stakeholder and Personal pensions - you can start these yourself, or you may be offered a Stakeholder Pension or a Group Personal Pension at work. These are also money purchase related schemes.

Pensions at work
If your employer offers a pension scheme it's a good idea to find out what type it is and how you can join. Your employer makes all the arrangements and may even contribute to it.
If you work for a business with fewer than five employees, your employer does not have to offer you access to a pension scheme. You should still check what's available, as some small employers may offer a scheme anyway.
The government is planning changes that will mean all employers will have to offer and contribute to a pension in future. Employers who haven't offered an occupational pension in the past may set up their own scheme, or may pay pensions into a new central scheme that is being set up.

What are the benefits?
Although you don't have to join any pension scheme offered through your job, it's usually a good idea to join an occupational pension scheme if it's available because:

• Your employer normally contributes

Plus you often get other key benefits such as:

• life assurance
• ill health benefits
• spouse or dependants pensions

Not all pensions offered by employers are occupational pensions. Your employer may offer a stakeholder pension or a personal pension through a group personal pension arrangement. These pensions are not called occupational pensions even though the employer may contribute.

Top tips

• Find out whether your employer offers a pension scheme, what type it is and when you can join it.
• Don't delay starting or joining a pension scheme - you will end up with a much smaller pension pot thereafter.

Pensions you start yourself
All employers with five or more employees have to offer access to a pension scheme. If your employer doesn't offer a pension, there are lots of pension providers for you to choose from to take out your own pension. You can go to a provider direct but bear in mind that their representatives can only advise you on their company's own products, or ones they have adopted from other companies.

Jargon Buster

A Day
6 April 2006 - the day the government pension simplification rules came into effect.

AVCs - Additional Voluntary Contributions
A pension top-up for an occupational pension. You pay contributions into a scheme run by your employer to boost your main pension.

FSAVCs - Free-Standing Additional Voluntary Contributions
A pension top-up policy for an occupational pension, but separate from your employer's pension scheme and normally run by an insurance firm.

Group Personal Pension
A type of personal pension offered by some employers but not classified as occupational (see money purchase pension).

Lifetime annuity
A lifetime annuity converts money from your pension fund into pension income, which is taxed. There are different types to suit your circumstances.

Money purchase pension
Some occupational pensions and all personal, group personal, stakeholder, FSAVCs and some AVCs are money purchase pensions. Your contributions are invested in, for example, the stockmarket. The size of your fund depends on your contributions and how well your investments do. At retirement, you have a choice of options to provide you with a retirement income.

Occupational pension
Only available through employers and run by pension scheme trustees. There are two types - salary-related (defined benefit) and money purchase (defined contribution).

Personal pension
A pension policy you take out yourself from an insurance company or another financial institution and into which you pay contributions. It may also be offered by employers. See also money purchase pension.

Protected rights pension
The part of your pension fund which was used to contract out of the State Second Pension (SERPS or S2P) that must be used to buy a protected rights annuity.
Salary-related pension scheme (final salary or defined benefit)
A type of occupational pension. The amount of pension you get is worked out on your salary at or near retirement, or when you left employment, and your pensionable service.

Stakeholder pension
A type of personal pension that has to meet certain standards set by the government. You can take one out yourself or it may be available through your employer, but is not classified as occupational. See also money purchase pension.

State Pension
The Pension Service (part of the Department for Work and Pensions) will pay your basic State Pension based on your National Insurance contribution record. You may also qualify for the additional State Second Pension based on your earnings and National Insurance contributions - see below.

State Second Pension
The State Second Pension is an additional State pension paid on top of your basic State Pension. This was called SERPS. Self-employed people cannot build up a State Second Pension.

Tax-free lump sum
An amount of cash set by tax law which you can take at retirement free of tax. Salary-related occupational pension schemes may have different rules on the amount of tax free cash you can take.

Advice
A recommendation about the most suitable product for you made by an adviser who is regulated by the FSA.

Authorised firm
A firm that has permission from the FSA to carry out regulated activities

FSA
The Financial Services Authority - the UK's financial services regulator.