Pension Planning

Pensions can be confusing but strip away the jargon and they are simply investments with tax relief. Not only do you get tax relief at your highest rate (for Tax Year 2007/08 22% or 40%) on contributions but your investment fund grows without tax on income and capital growth. New pension regulations were introduced recently and different complicated regulations have been replaced by one simple set of rules giving greater flexibility and freedom in how to save for retirement.

Some people question the wisdom of investing in a pension and have looked at other areas to provide income in retirement. Investment property has been a popular choice for some whilst others are hoping their home will provide for retirement. Property certainly has its attractions and can play a part in a retirement portfolio but it also has many drawbacks too. As with any investment portfolio it is important that you have diversified holdings and don't have "all you eggs in one basket". Pensions combine significant tax advantages and exposure to the growth potential of equities and should form part of any retirement planning.

Here are some of the features of the new pension regulations which make them so attractive:

• Tax relief - you are eligible for tax relief on pension contributions up to £3,600 or 100% of your annual earnings (subject to a maximum annual allowance of £225,000 for the tax year 2007/2008), whichever is the higher. This means that if you are a basic rate tax payer it will cost you only £78 to add £100 to your pension fund. If you are a higher rate tax payer the £100 investment will cost you £60.
      
• Tax free cash - On retirement you will have the option of taking up to 25% of your total savings as a tax free lump sum.
    
• Save in different pension plans at the same time - You can now be in a company pension scheme and have a personal pension as well. This gives you great flexibility. For instance, if you want to hold individual shares or commercial property in your pension you can now do this through a SIPP (Self Invested Personal Pension).
    
• Pay more into your pension - if you have a pension already, you have a lifetime allowance of £1.6 million for the tax year 2007/2008, which will increase each year until 2010.This is the amount you can save up to in your pension and get tax relief at your appropriate rate.

If you have a pension provided by your employer there should be someone on hand to explain the benefits and features. If you want to take out a personal pension, either as your main pension plan or in addition to your company scheme, you may find the different schemes confusing.  With this in mind, here is a brief summary of different types of personal pension. As with all pensions, they are simply investments with tax relief. They all have the same tax benefits and are covered by the same pension regulations. However they do differ in their investment flexibility, costs and charges, services and flexible in-retirement options.

Personal pensions

Personal pensions have investment choices based on the funds provided by a pension company, either managed by the provider themselves or by an external fund group.  Through these funds you are able to invest in equities, fixed interest (gilts & corporate bonds) cash and property. The choice of funds will depend on your attitude to investment risk and the number of years before your anticipated retirement.
 
Charges on a personal pension could be higher than the stakeholder option mentioned below  but there may be additional features available such as a wider fund choice and in-retirement options (income drawdown and phased retirement). 

Stakeholder pensions

A stakeholder pension is a personal pension which meets certain minimum standards relating to charges, restrictions on contributions and investment options. Whilst annual charges on the fund will be low (1.5% or below) you may be restricted in your fund choice.

Self invested personal pensions - SIPPs

The principal difference with a SIPP is that a much wider range of investments can be held - unit trusts, OEICs (Open ended investment companies), investment trusts, shares and commercial property. This gives greater control and freedom of investment. The investments may be made by the individual or by an advisor on their behalf.

Your pension will probably play a vital part in your well-being in retirement as you certainly won't be able to rely on the state to fund the golden years. Long term planning is the key to achieving a comfortable retirement.

This is a complicated area so you may want to take advice. The important thing is not to leave it too late.

This information represents our interpretation of current and proposed legislation and Inland Revenue practice as at the date of publication. These may change in the future.

The purpose is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice.