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Financing Your Retirement

It is never too early nor too late to start paying into a pension scheme. Many pensions turn out to be less than expected.

In this chapter, six things that really matter:

  • Maximising the state pension
  • Joining an occupational pension scheme
  • Starting a personal pension
  • Making use of the new stakeholder pension
  • Understanding annuities
  • Planning for your retirement

With tax relief (2001), for those on a marginal tax rate of 22%, a pension contribution of £100 costs only £78 (and for those on 40% only £60). It then earns income free of income and capital gains tax (except that tax deducted from dividends cannot be recovered). So pensions are a very tax-efficient investment.

Income tax is, of course, deducted from pensions in the course of payment, but a tax-free lump sum can often be taken on retirement.

A useful rough guide is that to achieve a pension of £20,000 a year starting from age 65, a man needs to pay about £250 a month if starting at age 30, £500 starting at 40 and £1,000 at 50. Women should add 10%.

Is this you?

• My state basic pension will not be the full amount because I have missed contributions. Can I make them up? • I have been paying for a personal pension but my new employer has a company scheme. Should I join? • I am self-employed and haven't bothered about pensions until now. Should I start a personal pension? • I have no earned income and have been told I cannot pay into a pension scheme. Is that correct? • I am retiring shortly. Annuity rates are so low, should I delay taking one out? • How do I find out how much pension I will receive?

Maximising the state pension

All state pensions are taxable and are adjusted annually in line with inflation.

Basic pension

A single contributor at the time of going to press receives £72.50 a week if full contributions have been made. A non-contributing spouse receives £43.40 a week.

A contributing spouse whose contributions have earned less can have their pension increased to £43.40. A widowed spouse can have their pension increased to the full amount received by the deceased spouse.

The pension can be left in after normal retiring age, up to age 70. It increases by 7.5% a year, which is not a very good deal as it takes some 12 years to recover the amount sacrificed.

Additional pension (SERFS)

This is paid in respect of each year you have made National Insurance contributions (NICs) in respect of earnings as an employee between the lower and upper earnings limits in 2001 £80 and £575 a week. It is not available to the self-employed.

The amount of pension payable is a complicated calculation. The formula changed with effect from April 2000 and will result in gradually lower amounts over the next few years. It is fully explained in a Benefits Agency booklet. There is a proposal to change to a flat-rate second state pension.

Contracting out

Many occupational schemes contract all members out of the additional pension. The scheme must guarantee a pension of no less than would have been received. Lower NICs are paid, the difference being called a rebate.

Employees who have a personal pension can also contract out if their scheme is an appropriate personal pension (APR). Instead of a rebate, the scheme receives a payment based on NICs, which must be claimed by the pension provider.

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