Pensions and Insurance

Pension is defined as a regular payment to a person of or above the official retirement age and to some widows and disabled people. Payment could be made by the State depending applicable financial year rules or a regular payment made during a person’s retirement from an investment fund to which that person or their employer has contributed during their working life. In summation, a pension provides income to live on in retirement.

Individuals are given tax reliefs on contributions up to stated applicable limit for respective financial years. Tax deducted is added to your pension fund as Pensions are free of tax deduction.

To receive full benefits of tax relief , pension contributions have to remain within a certain limit. Currently the limit is the greater of £3,600 and 100% of salary.

Members of pension scheme needs to be aware that a number of pensions firms are notoriously noted for looking after their own interest. Pension firms earn money by levying fees on contributors regardless of their failures to perform.

The main pension types are:

  • Personal Pension
  • Occupational PensionStakeholder Pension
    • Final salary scheme plan: offer a guaranteed pension amount, usually based on salary and time served with an employer. It has normal accrual rates of 1/80th or 1/60th of pensionable salary for each year of pensionable service.
    • Money purchase scheme plan: pension is based funds performance of contributions invested and the risk is there is no guarantee as to what is receivable.
    • Additional Voluntary Contributions (AVCs) is additional contributions made by an individual into occupational scheme to boost retirement benefits.
    • Free Standing Additional Voluntary Contributions (FSAVCs): this is run by a pension provider rather than the trustees of the employee’s pension scheme and has wider choice of investment available.
  • State Pension
    • Basic state pension: An entitlement for most people, the amount received from the basic state pension will depend on the amount of national insurance contributions paid during your working life.
    • State Second Pension (S2P) is not available for self-employed individuals (SERPS).  It is independent of basic state pension entitlement and it is based on a proportion of earnings during your working life.

There is no financial limit on the amount that may be contributed to a registered pension scheme. The maximum amount on which an individual can claim tax relief in any tax year is the greater of the individual’s relevant earnings (100% salary/net income) or £3,600.

If total pension input exceeds the annual allowance of £50,000 there may be a tax charge on the excess.

Maximum     age for tax relief

74

Minimum     age for taking benefits

55

Lifetime     allowance charge – lump sum paid

55%

Lifetime     allowance charge – monies retained

25%

Life time     allowance or on cumulative benefits exceeding

£1,500,000

Maximum     tax-free lump sum

25%

 

Auto-enrolment Pensions

From October 2012, companies have started to automatically enroll employees into workplace pension schemes as the government attempts to encourage more workers to save for their retirement.

There is no cap on level of charges pension providers have been encouraged to charge against your accumulated funds. The norm is that a pension fund charges should range from 0.30% to 0.50%, however some pension fund providers could charge as much as 2.00%.

Workers in small companies are likely to suffer from higher charges on their pensions schemes than those employed by larger firms, the minister in charge of the “auto-enrolment” scheme has admitted.

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