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Pensions Guide

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A pension fund is one of the most popular ways of providing income during retirement. Beyond the provisions made by the state there are essentially two types of pension.

Final salary pension

This type of pension provision is becoming increasingly rare this is where an employer has its own fund into which employees can pay into. Some employers’ might contribute towards the pension but effectively what happens is that the company manages its own fund, which builds due to the contributions from employees as well as the returns the fund makes through investment. When an employee retires, the pension is paid out from the contributions made by those employees who are still working. The fund itself is likely to be invested in various financial markets around the world. These types of pension are often quite advantageous, providing the employee with a guaranteed percentage of their final salary during retirement. From the employers point of view there were always more people paying into the pension than those claiming it and the tax advantages were also beneficial to both. Both of these dynamics have changed leaving many corporate pensions under funded. Very few employees signing up to company pension schemes will find themselves being offered such a plan for these reasons

Personal pension

Under such an arrangement you would still pay into the fund and for that matter so can your employer just as you can with a final salary arrangement. The main difference is that the fund itself is not the asset of the company. Instead it will be part of one of the many huge pension providers operating in the UK. The easiest way to think of this type of fund is that you are building up a pot of money. By the time you retire the value of the fund will be used to provide you with a monthly pension. There are two very important elements which will influence the rate at which your fund grows..

Retirement creeps up faster than you might think and if you hope to enjoy either a reduced workload in retirement or perhaps no workload you should think about how you are going to achieve it.

The content of this page is intended only to provide you with a simple overview. You should seek the advice of a pensions specialist who will be able to look at your personal circumstances and advise you accordingly.

Pension Funds

There are many funds in which your monthly pension payments can be invested. The choice is considerable and you should discuss your options carefully with a financial adviser. Each pension provider will have specific brand names for their funds although the following gives you an idea of some of the funds usually available.

The above merely serves to provide you with an idea of some of the funds you can invest in. The choice and risks are ultimately your responsibility and you should discuss your options with a qualified financial adviser as the value of a fund can fall as well as rise. Historically however the trend for investments is one of growth when measured over time.

Divorce Pensions

If you find yourself facing a divorce you may be entitled to share in the pension fund built up by your partner. It is no longer the case that the value of the pension fund either in today’s terms or its future ability to provide income is ignored from the divorce settlement

Such claims are dealt with on a case-by-case basis. It can be argued that you may not have personally contributed towards a pension scheme because you were fulfilling another role within the marriage such as racing the children. This argument can apply equally to both sexes and does not simply have to be based around the raising of the family. Perhaps one partner took a supporting role to a partner who built their business or career.

Whatever your circumstances are you should be aware that the value of a pension fund contributes to the value of an estate and you should seek the advise of a divorce specialist and possibly a financial adviser who can evaluate your situation.

You might be aware of some of the recent sensational divorce pensions cases and subsequent settlements surrounding the marriage break ups of top international footballers and business people.

Retirement Pensions

It’s sad but true. Most people today are not in a position to retire in the style they anticipate and yet there is something that can be done about it. Retirement pensions should be considered as part of a retirement strategy, which could also include other investments like property. People have been investing in residential property over the past 10 years as though it was the only investment fund and that its continued performance was guaranteed. Pensions should also be considered as part of the retirement strategy for a number of reasons.

Payments into a pension fund invariably qualify as a tax-deductible investment. In other words if you happen to be paying tax at a 40% rate then you can enjoy the benefits of investing £100 for every £60 you would have taken as net income within the earnings threshold which would be taxed at this rate. Please note that this example does not take account of any other government deductions or indeed allowances that an individual might qualify for.

To date residential property investments have performed extremely well but as any professional property investor will agree if property is to be used for income there might be times when rental returns can stagnate. If this is to be the only retirement based investment then you could be exposed to such a period of stagnation, particularly when some analyst might argue that in general property holdings are somewhat oversubscribed.

You should discuss your retirement opportunities with a professional pensions adviser as the above serves merely to provide you with some general ideas on considering your retirement options

Pension benefits

Many people have been frightened by the pensions industry. Press coverage of people who have been badly advised doesn’t help the case and the downturn in the performance of pension funds during the late 1990s still lingers in people’s minds. Yet we conveniently forget the period from the late 1980s through to about 1997 when property prices in most parts of the UK barely grew at all. This would not have been a great time to retire with nothing other than property holdings, particularly of they had debts attached which relied on capital growth for their repayment. The simple fact is this…not all markets perform 100% of the time. There are benefits in holding a pension fund that are summarised below.

The above serves merely to provide you with some thoughts and ideas and does not account for any changes that may impact the industry from time to time. You should always seek the professional assistance of a pensions adviser

Pension Annuity (s)

This is the bit that bamboozles most people!

If I invest X per month now then what the hell will I be able to draw down a month when I retire?

The other problem is that the financial illustrations, necessarily legal and technically correct, often serve to add to the confusion.

Firstly as with any long-term investment there are a number of variables.

The easiest way to think about your potential future income is to establish what your “pot of money” is worth right now. In other words if you were going to retire right now this would be the pension fund on which your retirement would be based.

Lets say the fund was worth £100,000 and that the fund could be sold to an annuity provider right now at a rate of 8% per annum. Very simply, and we mean simply, your annual income would be about £8,000 per annum.

Compare this principal to a property you might own which is also worth £100,000 and you are going to retire now and use it as income. You will have to rent it. Lets say you get £600 per month. This equates to £7,200 per annum less any agency fees, maintenance etc.

At this point you MUST discuss your options with a professional financial adviser as the above cannot serve to cover every aspect of the complicated subject of annuities but we hope that the concept helps a bit. The amounts discussed are of course utterly fictitious and very general.

Important Note:

A guide to pensions and pension related information. Always consult a financial expert, for instance your own bank, before taking on a pension or making any other kind of financial commitment.

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