The Pensions Advisory Service - saving for retirement
2The Pensions Advisory Service Limited.Company limited by guarantee.Registered in England and Wales No. 2459671.Registered Office as shown.Saving forretirementContacting usThe Pensions Advisory Service11 Belgrave RoadLondon SW1V 1RBHelpline 0845 601 2923General Ofﬁce 020 7630 2250Fax 020 7233 email@example.comThis leaﬂet is available inlarge print or Braille.Please note that this is a guide forinformation only. It does not cover all therules in every situation, nor does itprovide a full interpretation of the rules.It should not be treated as a completeand authoritative statement of the law.We are a voluntary independentorganisation, grant-aided by theDepartment for Work and Pensions.We publish informationleaﬂets on various pensiontopics. The currentleaﬂets are:Concerned about your pension?Getting information about your pensionIll-health early retirementPension dispute procedurePersonal pension problems? Where to gofor helpThe Pensions Advisory Service and thePensions OmbudsmanTransferring your pension to anotherschemeWhat are Additional VoluntaryContributions?Where is my pension?Winding up a pension scheme - a guidefor scheme membersWomen and Pensions - Know your rightsand optionsThese leaﬂets are available free from theaddress shown or from our main website.February2006
3 1Is this leaﬂet for you?Many people are under-saving for their retirement.The government is concerned about the strain thestate pension system is likely to face in the futureand is trying to encourage more private saving. Atthe same time, potential savers are confused by thecomplexity of pensions and the barrage of differentstories about pensions that hit the headlines.The purpose of this booklet is to provide somesimple guidelines to help anyone wanting to planahead for retirement, which could be up to 40 ormore years away.How can The Pensions Advisory Service help?The Pensions Advisory Service has been providinghelp and advice to members of the public onpension matters since 1983 either by telephone orwritten advice. We can also help people who have apension complaint or dispute.We operate a permanent helpline giving freeon-the-spot pensions assistance and advice. TheHelpline - 0845 6012923 - operates Monday toFriday between 9am and 5pm (calls charged at localrate).We are a voluntary independent organisation, grant-aided by the Department for Work and Pensions.Contents1 Why save forretirement?2 State pensions6 How much shouldyou save?7 Don’t put offstarting a pension8 Starting out on apension plan12 Should you savewith a pension (oranother way)?14 Financial planning- some basics18 Financial planning- regular reviews20 Reviewing plans ifyour circumstanceschange24 Looking ahead towhat happens atretirementFREEIMPARTIALADVICEWhy save for retirement?Retirement for many people means givingup work and enjoying other things in lifesuch as family, hobbies and holidays. Even ifretirement is 20, 30 or more years away, itstill means the end of earning an income.You need to plan now how you will replacethe income you earned.You could rely solely or mainly on thegovernment to provide - we explain belowwhy that may not be a good idea.You could rely on the savings you havealready put away. However, on currentestimates1up to 12m employees are currentlyunder-saving to some degree. As many as7.4m of them are not saving anything at all!Out of the 11m retirees in the UK, over athird are struggling to live the life they hadanticipated. According to recent research2,36% of over-55s ﬁnd that a lack of cash meansthey cannot afford the things they thoughtthey would be able to in retirement. Theaverage shortfall is an extra £7,300 a year.Will the State pension be enoughto live on?In the UK, each generation is living longerthan their parents’ and grandparents’generations. Men reaching 65 today canexpect to live on average till 81 and womentill 843. The pensioners of 2025 could beliving two years even longer4. That meansthe average person might have to providean income for themselves for perhaps 20years or more in retirement.Ten Golden Pension Rules1 Don’t rely on thestate pension alone2 Don’t put off startinga pension3 Explore other waysto save4 Show an interest inyour pension5 Consider joining youremployer’s scheme6 Review your pensionregularly7 Get a forecast of yourstate pension8 Keep paperwork safe9 Take professional advice10 Always ask questions1 ABI2 Prudential 25/08/20053 Government Actuary’s Department4 Ofﬁce for National Statistics
2 3Our ‘ageing population’ is putting hugepressure on government resources. This isbecause no money is put aside in advance topay for pensions and other social securitybeneﬁts. Instead, today’s pensionersdrawing a state pension are supported bythe taxes and National InsuranceContributions of today’s workers. Currentlyin the UK there are 3.5 workers for everypensioner. In the future, there will be morepensioners - the retired population is set toincrease by almost 50% by 2040, to nearly16m people, as a result of improved lifeexpectancy. By then there could be as fewas two workers to support each pensioner.This means that a smaller proportion of thepopulation in work will be asked to supportan increasing number in an ever-lengthening retirement period. There is noway of knowing what will happen to statepensions by the time you come to retire.Even though the state pension currentlyprovides a reasonable income for a largeportion of the population, it is unlikely to doso in the future without large rises intaxation. This makes private saving essential.Private pensions have not always come upwith the goods. But, those with a goodcompany scheme or who have made largecontributions to a good personal plan are,generally, going to be far more comfortablyoff than someone forced to rely mainly onstate beneﬁts.This booklet aims to show you how you cantake steps towards planning an adequateretirement.State pensionsBasic state pensionYou earn the basic state pension by payingNational Insurance (NI) contributions duringthe course of your working life.The full basic state pension is £84.25 in2006-07. The minimum basic state pensionyou can get is 25% of the full basic statepension. The years during which you buildup your rights to the basic state pension arecalled ‘qualifying years’. To get a minimumbasic state pension you will need to havea minimum number of qualifying years forNI purposes - this is normally 10 years fora woman and 11 years for a man (althoughthis will increase to 11 years for all by 2020with the increase in the state pension age forwomen). You will get a proportion of the fullbasic state pension between 25% and 100%depending on the number of qualifyingyears you have. For example:Married women who do not qualify for abasic state pension in their own right, oronly qualify for a small amount, on reachingstate pension age may be able to get a basicstate pension based on their husband’s NIcontributions. This is only possible once thehusband has reached 65 and has retired. Ifyou are in this position, you may be able toget a basic state pension of up to £50.50 in2006-07. However, you can get anyadditional state pension you are entitled toin your own right from age 60 regardless ofyour husband’s circumstances.Also, anyone who has given up work for aperiod to bring up children or care forsomeone might need to check that theyhave received a speciﬁc protection calledHome Responsibilities Protection (HRP).For more information on HRP and the statepension for women, see our booklet‘Women and Pensions - know your pensionrights and options’, available from ourHelpline 0845 601 2923 or our website.On top of the basic state pension, youmay be entitled to a further pension,which is based upon your earnings.Until 6 April 2002, this additionalpension came from the State EarningsRelated Pension Scheme (SERPS). FromApril 2002, SERPS has been replaced bythe State Second Pension, known as S2P.SERPSSERPS was introduced in April 1978. UnderSERPS you earn a pension on your earningseach year over a Lower Earnings Limit,which used to be the point at which youstart to pay National Insurance (‘NI’)contributions. Income over the UpperEarnings Limit did not count towards yourSERPS pension (and it did not count towardsNI contributions). SERPS was not availableto those who were self-employed.The extra pension SERPS aimed to providewas between 20% and 25% of your earningseach year between those two limits.Any pension you have built up in SERPS willbe paid out along with the basic statepension when you reach the normal stateretirement age (see the box opposite).Table 1Man (or Woman born after 1955)Number ofyears’ NI11 22 33 44Percentage ofstate pension25% 50% 75% 100%Woman born before 1950Number ofyears’ NI paid 10 20 30 39Percentage ofstate pension 26% 52% 77% 100%Note: the state pension age for women will increasegradually from 60 to 65 years between 2010 and2020. To ﬁnd out your state pension age visitwww.pensionguide.gov.uk or call our helpline0845 601 2923.Don’t rely onthe statepension aloneS2PYou begin to qualify for S2P when you earnmore than a Lower Earnings Limit of £4,368a year (2006-07 ﬁgures). Income over anUpper Earnings Limit of £33,540 a year(2006-07 ﬁgures) does not count towardsS2P. S2P is paid in addition to any basic statepension you are entitled to. S2P is notavailable to those who are self-employed.Under S2P the state pension earned bythose with earnings between the LowerEarnings Limit and the Lower EarningsThreshold (£4,368 to £12,500 for 2006-07)is double what they would have got fromSERPS. Everyone who earns under £12,500but more than £4,368 is treated as if theyearned £12,500.
4If your earnings are higher than £12,500 butless than £28,800 your additional statepension will build up at a higher ratethrough the S2P than it would have doneunder SERPS.Until 6 April 2002 only employees couldqualify for additional state pension underSERPS. Carers and people with long-termillness or disabilities who were notemployees could not build up additionalstate pension. However, since 6 April 2002you can build up an additional state pensionthrough S2P for each full tax year you donot work at all, or earn less than the NILower Earnings Limit if you are a carer, oryou have a long-term illness or disability,and meet certain criteria.For more information on how to qualify callour Helpline 0845 601 2923.Contracting-out of the additionalstate pensionYou can if you wish choose to opt out of S2P.This is referred to as ‘contracting-out’. It ispossible to contract-out of S2P by joining anoccupational pension scheme or a personalpension scheme. This involves a reductionin the NI contributions you pay, and/or a‘rebate’ of part of your contributions intoyour pension fund.For occupational schemes, the decisionwhether the scheme is to be contracted-outor not rests with the employer. Although theemployer makes the original choice, inmoney purchase schemes the individualshould have a choice whether to contractback in or not.In return, both you and your employer pay areduced level of NI contributions. Inaddition, in money purchase schemes, theRevenue pays a percentage of your andyour employer’s contributions (the ‘rebate’)back into the scheme. The percentage paiddepends on your age; the older you are, thehigher the rebate.Under personal pension schemes thedecision to contract-out is yours. If you doso, you and your employer pay NIcontributions at the full rate and after theend of the tax year the Revenue pays apercentage of these contributions back tothe pension provider. The percentage paiddepends on your age. You will also receivetax relief at the basic rate on your share ofthe contribution.If you are contracted-out via a personalpension there is no guarantee that thepension you will ultimately get will matchthe state pension you would have got fromS2P. It may exceed it or it may in fact be less.The decision to contract-out or remaincontracted-out very much depends uponyour attitude to risk and whether or not youfeel your personal pension arrangement cangenerate more of a pension through itsinvestment performance than the moneyyou would get under S2P.The other factor to take into consideration isyour age. As you near retirement you haveless time to achieve an adequate investmentreturn to replace the S2P given up over thesame period. From 6 April 1997 there was achange in the way that the rebate (of NIpayments) was calculated, which may alsobe relevant. From this date onwards, thelevel of rebate that an individual receiveswill increase as they get older.You should therefore review your existingcontracted-out arrangements on an annualbasis. You can change from contracted-outstatus to contracted-in status, and vice-versa, from year to year.A person who is ‘contracted-out’ through apersonal pension, earning less than £12,500from April 2006 in a tax year, will also get anS2P top-up for that year. The top-up reﬂectsthe more generous additional state pensionprovided by S2P.You can obtain a useful leaﬂet explaining thebackground to contracting-out entitledContracted-out Pensions - Your Guide(PM7) by calling the Pension Service on08457 313233. You can get a more detailedguide to the rebates that are given calledEmployee’s guide to Minimum Contributions(CA17), by contacting the National InsuranceContributions Ofﬁce on 0845 915 0150. TheFinancial Services Authority (FSA) alsopublish a factsheet entitled The StateSecond Pension and contracting-out whichyou can obtain by calling 0845 606 1234.Get a forecast of your state pensionA forecast will enable you to establishwhether there are any gaps in your NIcontribution record and give you theopportunity of making this good by payingvoluntary contributions, if that is possible.Give yourself time to act and get a forecastat least ten to ﬁfteen years before you aredue to retire. To obtain a forecast, ring theFuture Pension Centre on 0845 300 0168.Pension CreditPension Credit was introduced in October2003, with the aim of lifting the poorestpensioners out of poverty whilst notpenalising those who have attempted tosave for their retirement.Pension Credit has two parts - the GuaranteeCredit and the Savings Credit. It is possibleto receive either part exclusively or acombination of both. The Guarantee Creditprovides a top-up to guarantee a minimumlevel of income for both single people andcouples. It is payable from age 60.5
6 7The Savings Credit is payable from age 65. Itrewards people who have made modestprovision for their retirement: savings of£6,000 or less are ignored. You are assumedto receive an income of £1 a week for every£500 (or part of £500) saved above that,whether you take an income from yoursavings or not.How much should you save?It is sometimes useful to start by asking‘How much will I need to provide the sort ofretirement I want?’ The state pension is a ﬂatrate, weekly payment, at present £84.25 aweek (2006-07 ﬁgures), for a single personwho has paid their full quota of NationalInsurance contributions (see Chapter 2 onthe state pension). That is a good startingpoint, but is £84 a week enough to live on?If your answer is ‘Not by a mile’, you willneed to save more of your current incomethan if you answered ‘Not quite’. There is nosingle deﬁnition that suits everyone.However, it is useful to think in terms ofreplacing a percentage of the income youenjoy now. Several studies have suggested arough guideline - a half to two-thirds of yoursalary - might be enough to meet yourexpectations in retirement.To get there, you need to put away a certainpercentage of your income now. As a rule ofthumb, a rough starting point would beabout half your age as a percentage of yourincome. So at 22, that would mean 11% ofyour income, but if you cannot afford thatmuch, any lower amount would be useful asa start. Starting at 35, that would mean17.5%, but the later you start, the moreimportant it is to keep your contributionlevels up. Because of the way compoundinterest works, the earlier you start on apension plan, the less it will cost you. Theopposite applies the later you start.Don’t put off starting apensionTable 2 below illustrates how much today’sworkers on different incomes might need tosave to enjoy half or two-thirds of theirincome in retirement. This guide assumesretirement at 65 and state pensions at about£6,000 a year.So, middle-income earners who retire at 65ought to be saving 8-17% of pay each yearto achieve a replacement rate roughlyequivalent to 50-67%. However, many peoplewould like to retire earlier and wouldtherefore need to save more. For example, ifyou wish to retire at 60, the level of savingrequired increases to 13-25%.Other reasons to save more include: notstarting to save until after age 35, lowinvestment returns, any breaks incontributions, changes in earnings levels.To put this in context, if you are not in anemployer’s salary-related scheme, whenyou retire you will probably have to use thepot of money you have built up to buy anannuity - an insurance policy that providesan income for life. These are not cheap. Ifyou want a yearly retirement income of say,£20,000, at age 60 a basic annuity will costyou around £300,000. If you want yourincome to increase with inﬂation then it’seven more expensive - over £400,000.If you want to put aside enough money toretire on, plan the amount you cancontribute, the investment risk you want totake and when you plan to retire. The lateryou begin, the harder it will be to build upenough money for the future.There are various pension calculation toolsavailable on the Internet to help youvisualise the effect of investing a certainamount of money for 20 or 30 years. Thereare also some tools that can show you howmuch money you will need to build up toafford the lifestyle you want. The sites listedbelow provide some useful tools:www.pensioncalculator.org.ukwww.fsa.gov.uk/consumer/pensionsAlso, many employers’ pension schemes andmany insurance companies have their ownweb-based pension calculators to guide you.Table 267% replacement rate 50% replacement rateIncome level today Man Woman Man Woman£9,000 0% 0% 0% 0%£13,500 8% 9% 0% 0%£21,250 13% 14% 7% 8%£32,500 15% 17% 9% 10%£50,000 17% 19% 12% 13%Assumptions: saving starts at age 35; retirement at age 65; investment returns at 3.8% above inﬂation;person did not contract-out of SERPS/S2P.Exploreother waysto savePension Credit has a particular relevance tolone parents and others with caringresponsibilities who are sometimes unableto make additional pension provision due tolow pay and part-time work. It is thereforemuch more difﬁcult for them to provideﬁnancial security for themselves in retirement.However, Pension Credit will only everprovide you with a basic level of income.There is also no guarantee that PensionCredit or a similar plan may exist in the futurefor today’s workers and savers. So it still makessense to make some savings for retirement.When starting to make long-term savings,consider whether you can continue to putenough away to make a difference and nothave to rely on the government.
8 9Starting out on a pension planThe following is a helpful list of questions toask yourself, or a ﬁnancial adviser (if youdecide to get ﬁnancial advice).1. What pension plans are available to me?2. What are the differences between them?3. How much can I afford to pay regularly?4. When do I hope to retire?5. What other savings, investments orother assets do I have?6. Will my partner have a pension?7. What am I likely to get from statepensions?8. What do I know about investing mycontributions and how do I feel aboutrisk?9. How often will I need to review my plans?Consider joining youremployer’s schemeAlways consider joining your workplacepension scheme. The employer will becontributing and for you not to join istantamount to giving up pay. One exceptionmight be in a salary-related scheme if thecompany were to be ﬁnancially insecure andat risk of becoming insolvent.However, with the arrival of the PensionProtection Fund, on 6 April 2005, some ofthe risks for members of such schemes havebeen greatly reduced. The PensionProtection Fund aims to provide increasedprotection for members of salary-relatedschemes by paying compensation if theemployer becomes insolvent and thepension scheme is underfunded.The PPF aims to provide 100% of beneﬁtsfor members over normal retirement age;90% of beneﬁts for members below normalretirement age; 100% of pensions paid earlyon the grounds of ill health (regardless ofage); capped at £25,000 a year.The different types of pension plan areexplained in the rest of this section.Occupational PensionsOccupational pension schemes are pensionarrangements that are set up by employersto provide income in retirement for theiremployees. Although the employer isresponsible for sponsoring the scheme, it isactually run by a board of trustees - with theexception of public sector schemes, whichare set up and run under statute. It is thisboard of trustees that is responsible forensuring payment of beneﬁts.One of the beneﬁts of an occupationalpension scheme is that the employer ispaying a contribution on your behalf. Inaddition your contributions are paid beforetax is deducted - you are therefore gettingtax relief at your highest rate.There are two different types ofoccupational pension scheme - moneypurchase and salary-related. The followingis a simple explanation of how each of themworks.Salary-relatedSalary-related schemes are sometimesknown as deﬁned beneﬁt schemes.Members contribute to the scheme with thepromise of a certain level of pension. Yourcontributions are pooled with those paid byall other members and the employer. Thetrustees invest the monies for the beneﬁt ofall members.The amount of pension payable from such ascheme is dependent upon:• the length of time served in the scheme(known as pensionable service)• earnings prior to retirement (known asﬁnal pensionable salary), and• the scheme’s ‘accrual rate’. The accrualrate is the proportion of salary that isreceived for each year of service. So, ifthe scheme has an accrual rate of 60, themember will receive 1/60th of his/herﬁnal pensionable salary for each year ofcompleted service.For example: £pension =pensionable service x£ ﬁnal pensionable salary60It is usually possible to exchange some ofyour pension for a lump sum, paid free oftax. Public sector schemes usually offer apension and a lump sum separately so youdo not have to give up any of your pensionfor a lump sum, though they tend to have alower pension accrual rate so the end effectis broadly equivalent.Make sure you are aware of your beneﬁtsbuilt up to date. You can ask for a beneﬁtstatement from the trustees of your schemeso that you can ascertain how much yourpension beneﬁt is likely to be when you retire.Show aninterest inyour pension
10 11Money PurchaseMoney purchase schemes are sometimesreferred to as deﬁned contribution schemes.Employers and employees contribute to thescheme, where the money is invested, andbuild up, for each scheme member, a ‘pot ofmoney’.These types of scheme may require you tomake an investment choice. Many offer thechance to invest in funds such as unit-linkedfunds, unit trusts, and investment trusts.These funds tend to invest mainly in stocksand shares, so there is some risk involved.The reason for taking some risk is that overmedium-to-long-term periods (5 years ormore), shares are expected to bring biggerreturns than deposit accounts or bonds.This may not always be the case, but it is anapproach shared by the majority ofprofessionally managed pensions.Some pension providers offer a ‘default’investment (this is the investment which willbe used if you don’t want to make anyinvestment decisions yourself). The defaultfund may be called the ‘lifestyle’ option.This generally means your money isinvested in higher-risk growth funds whileyou are young, and then transferredautomatically to lower-risk investments ordeposits the closer you get to retirement.You should check with your provider whatthe default fund invests in.Like all investments the value of yourpension investments may go down as wellas up. Be sure that you are aware of this risk.Some pension plans may offer bank orbuilding society deposit accounts. There ishardly any risk of losing your originalinvestment (your ‘capital’), but your savingsusually grow only at a modest rate and theirpurchasing value can be reduced by inﬂation.At retirement you can take part of the pot asa tax-free lump sum but the rest must beused to purchase a pension. The amount ofpension payable from this scheme isdependent upon:• the amount of money paid into thescheme (by the member and the employer)• how well the investment performs, and• the ‘annuity rate’ at the date ofretirement (the annuity rate is the factorused to convert the ‘pot of money’ into apension).Make sure you are aware of your beneﬁtsbuilt-up to date. You should receive abeneﬁt statement automatically from thescheme each year without having to requestit, giving you an estimate of how muchpension you might receive when you retire.Stakeholder Pensions andPersonal PensionsA personal pension plan is an investmentpolicy designed to offer a lump sum andincome in retirement. They are available toany United Kingdom resident who is under75 years of age and can be bought frominsurance companies, high street banks,investment organisations and some retailers(ie. supermarkets and high street shops).Stakeholder and Personal pension plans aremoney purchase arrangements. This meanscontributions are paid into the plan, themoney is invested and a fund built up. Theamount of pension payable when themember retires is dependent upon:• the amount of money paid in• how well the investment funds perform,and• the ‘annuity rate’ at the date ofretirement. An annuity rate is the factorused to convert the ‘pot of money’ into apension.You can retire at any age between 50 and75. (From April 2010, the minimum age willbe 55.) When you do retire, you cangenerally take up to 25% of the value of thefund as a tax-free lump sum. The remainderof the fund must be used to buy an annuitywith an insurance company.Stakeholder pensions have to meet someminimum standards.Low costThe company managing your stakeholderpension cannot charge more than 1.5% ofthe fund value per annum for the ﬁrst 10years that the product is held and 1%thereafter.Flexible paymentsThere are no penalties for stoppingcontributions and you can pay into itwhether or not you are earning an income.In addition the minimum contributioncannot be less than £20 (unless yourscheme has a lower limit) in any periodwhether a regular or a ‘one-off’ payment.This may therefore be suitable for people onmoderate incomes who wish to build upprivate pension provision. It may also besuitable for people who have changing workpatterns, eg. if you have breaks inemployment due to caring responsibilities,as it is very ﬂexible.Penalty-free transfersIf you want to move your stakeholder fundto another provider or another pensionscheme, there will normally be no chargesfor making the transfer. If you have investedin a with-proﬁts fund you should checkwhether your provider will make a ‘marketvalue reduction’ if you switch.The Pensions Regulator produces a list ofregistered stakeholder providers. You canvisit their website at www.thepensionsregulator.gov.uk or you can call them on0870 606 3636 to request a paper copy ofthe register. You should consider seekingindependent ﬁnancial advice on this issue.The Financial Services Authority provide thefollowing free publications which you mayﬁnd useful:FSA guide to ﬁnancial adviceFSA factsheet - Stakeholder pensions anddecision treesYou can obtain these publications by calling0845 606 1234.For more information on stakeholderpensions contact our Helpline or visit ourwebsite www.stakeholderhelpline.org.uk.Considerjoining youremployerscheme
12 13Should you save with apension (or another way)?A pension is not the only way to save forretirement, but the tax breaks - you can getincome tax relief on your contributions up tothe highest rate of tax you pay - make itappealing for many.Wrong time?In your 20s, with retirement so far off, and,for many people, plenty of debts to be paidoff, saving for your old age might seem likenonsense.Indeed, at any age clearing debts could bemore important than saving for retirement.However, unless you are in dire straits, ifyour company offers a pension scheme, youshould probably join. Your employer maystart off contributing around 3% of your pre-tax salary, with you expected to contributeat least 3% as well - and you get tax relief atthe highest rate of tax you pay (22% forstandard rate or 40% for higher ratetaxpayers). The net cost to you wouldtherefore be 2.1% (standard rate) or 1.8%(higher rate).It also gets you into the saving habit, makingit less painful to increase your paymentslater. If you don’t join the scheme, you’reeffectively throwing money away: both youremployer’s contribution and thatgovernment tax relief, which is the mainbonus of saving through a pension.Other priorities?A whole host of needs and commitmentscan stop you from putting money away forretirement, whatever age you are:mortgages, children, saving for a rainy day.There is a trade-off to be made betweendoing what is affordable and makingsufﬁcient savings to build up an adequateretirement pot.Remember, though, that pension plans, inparticular ones offered by employers, cangive you extra beneﬁts besides an incomefor you, that can help towards looking afteryour mortgage or family. With a pensionplan, you can relatively cheaply make sureyour family gets a lump sum and incomefrom the plan when you die, whenever thatmight happen.The money doesn’t feel likeit’s mineIf you pay into a private pension scheme,you are in some ways entrusting yourmoney to other people. You may or may nothave the choice of how much you are goingto pay, and where it goes. But, youremployer’s scheme, or the pensioncompany, looks after your investment,which will increase in value over time. If youare in a salary-related scheme, the longeryou are in it, the more you earn.For good reasons, the money is locked awayuntil you retire, and there are different rulesabout how you can manage that money andget access to it, depending on what plan youhave joined. Pension plans can seemcomplicated and inﬂexible. Other types ofsaving can seem easier to understand. Theadvertising can make the product look good- for example by promising attractive returnsover a relatively short period of time, 2, 5 ormaybe 10 years.But ultimately, only a pension plan aims toprovide an income in retirement.Explore other ways to saveNot all types of investment enjoy boomtimes at the same time, so it is important todiversify your savings and investments,provided you don’t break them up into toomany tiny bits. Small pots cannot work ashard as larger investments (and arguablyhaving lots of investments makes it harder tokeep track of them).Each type of investment has its owncharacteristics, such as how long you shouldhold them to achieve a good return, howaccessible they are, what they cost to set upand run, whether you can use them toprovide an income. Pension plans are along-term investment, often providingaccess to a range of different underlyingasset types (shares, bonds, property, cash).Access to your beneﬁts depends on thepension plan’s rules. The beneﬁts cancomprise capital, by way of a tax-free lumpsum, and regular income, by way of apension or an annuity.Property and individual savings accounts(ISA’s) are possible alternatives to pensions.Do’s and don’tsThe Financial Services Authority (FSA),whose role includes educating investorsabout using all sorts of ﬁnancial products,offers the following list of ‘Do’s’ and ‘Don’ts’for investing for the long term.Don’t choose investments that lock you intoa ﬁxed pattern of saving for many yearsunless you are sure you can keep up thepayments. You often lose money if you stopsuch savings plans early. Private pensionplan providers charge costs even when youare not paying money into the plan.Don’t forget that inﬂation can seriously eatinto the value of your money. Chooseinvestments where the return is likely tobeat inﬂation.Do think about the level of risk you arecomfortable with. And do realise that highreturns often come at the risk of losingmoney.Do bear in mind that if you chooseinvestments with no or low ‘capital risk’ (seepage 17 for a deﬁnition), you’ll have to settlefor lower returns. For example, a buildingsociety account has no capital risk but overthe long term tends to give a much lowerreturn than, say, a share-based unit trust.Do spread the money, if possible, acrossseveral investments - for example, somemoney in savings accounts, some money inbonds, some in share-based investments.This evens out the risks. It means you’re lesslikely to make spectacular proﬁts but alsoless likely to suffer large losses.Review yourpensionregularly
14 15Financial planning -some basicsChoosing without Financial AdviceYou do not have to take advice before youstart a pension. If your employer provides apension scheme that it pays into, all yougenerally have to do is complete an applicationform to join the scheme. Also, some providersof stakeholder and personal pensionproviders make it easy for individuals to startup a plan without using a professional adviser.However, if you do not feel very conﬁdentwith ﬁnancial decisions and ﬁnancialproducts, it is a good idea to take professionaladvice before making important decisions(such as changing your pension provider orseeking a transfer). Also, if you do not takeprofessional advice, and the pension youchoose turns out to be unsuitable, you willhave a weaker case for complaint.Try to read as much information as you canabout the pension plans you are interestedin, whether you plan to take advice or not.The provider will produce brochures andadvertisements about their plan. These willinclude factual information, and althoughyou can expect the facts to be accurate, youshould be aware that brochures andadvertisements are marketing informationand not investment advice. Companies designthem to show a product in its best light.Tips on how to ﬁnd out more:• shop around and get information aboutseveral comparable products• consult different pension providers,contact several ﬁrms and ask them for a‘Key Features Document’ - thisdocument describes the pension plan• follow the ‘decision tree’ the stakeholdercompany will provide you with - this is aﬂowchart designed by the FSA to guideyou through your pension options. Thedecision tree is the same for allcompanies’ stakeholder pensions, soyou only need one• check the charges for any pension andcompare them with the charges forstakeholder pensions.The FSA’s comparative tables can help youcompare stakeholder and personal pensionscharges.Getting ﬁnancial adviceYou can approach some pension providersdirect but you should be aware that theircompany representatives can only adviseyou on their company’s own products or onethey have adopted from another company.Always use an authorised adviser (that is, acompany or person authorised by theFinancial Services Authority, FSA). The FSAauthorises advisers to give advice onpersonal and stakeholder pensions, butdoes not regulate advice about employers’occupational pension schemes.Authorised advisers fall into three groups:• Tied Agents, who offer pensions andinvestments from a single company orgroup of companies, they can give you alist of these companies• Multi-tied Agents, who offer productsfrom a limited number of companies,and again they can give you a list• Independent Financial Advisers, who canoffer products from the whole market.Advisers will give you a ‘Keyfacts’ documentexplaining what type they are and whatservices they offer. This document shouldalso tell you how the adviser expects to bepaid - either by a fee or by commission fromthe product provider.After discussing your personal needs andcircumstances with you, the adviser willrecommend a product from the range onoffer. The adviser will explain why they havesuggested that product.To help advisers give you proper adviceabout your pension options, you shouldalways tell the adviser whether your employeroffers an occupational pension that youcould join, or have joined. Advisers willusually tell you to check out your employer’soccupational pension as a ﬁrst priority.KeeppaperworksafeSome questions you should askMake sure you come away from yourmeeting with the Financial Adviser with afull understanding of what you are puttingyour money into. Remember, there is nosuch thing as a stupid question aboutpensions. Pensions can be immenselycomplicated and people sometimes feelinadequate when faced with one. Youshould not worry about this. You have aright to have things properly explained toyou in language you can understand; youshould not feel inhibited about asking themost basic questions.
16 17Below is a list of some recommendedquestions to ask an adviser, if the KeyFeatures Document explaining the mainfeatures of the pension does not cover them.1. What sort of investment would be mostsuitable for me, given:a. that I can/cannot join an occupationalpensionb. the length of time until I retirec. my employment status and prospectsd. my other savings, investments andassets, ande. my feelings about risk?2. How much should I be saving to get theretirement income I want?3. Is a stakeholder pension the best optionfor me? If not, why not?4. If I take out a particular pension now, canI switch to another later? Will there becharges for switching?5. What are the charges for the pensionyou are recommending now? How muchof my investment will be lost throughthese charges?6. Must I pay regular contributions or can Ivary my contributions?7. What happens if I choose to makeregular contributions but can’t keepthem up after all - say, because I’m ill ormade redundant?8. What will my dependants get when I die?9. At what age can I start taking mypension?10.Can I change the age I start taking mypension without penalty?Understanding investmentsThe name of each fund usually describes thetype of investment it holds, e.g. with-proﬁts,unit-linked, property, and ﬁxed interest. Youcan usually switch between funds and theﬁrst switch a year will normally be free.The most common choices tend to be:Investment funds (unit-linked)With these, you share in the performance ofa fund of underlying investments. Unit-linked funds cover a wide range ofinvestments. For example:Actively managed fundsFund managers choose investments thatthey expect to perform best and switchthem as market conditions change.Funds invest in a range of assets (stocksand shares, ﬁxed-interest bonds, forexample). Some funds invest in theshares of companies from singlecountries or regions, such as the UK,USA, Europe and the Far East.A ‘managed’ or ‘balanced’ fund usuallyaims to spread risks across differenttypes of investment.Tracker fundsThe investments in a tracker fund moveclosely in line with a selected stockmarket index, such as the FTSE All-ShareIndex. This means the value of trackerfunds will go up or down in line with therelevant market. Tracker funds usuallyhave lower charges than activelymanaged funds because there are fewerdecisions being made about theinvestments.With-proﬁts fundsInsurance companies offer these funds andinvest your contributions in stocks, sharesand gilt-edged securities. Your investmentgrows as the company adds yearly bonusesbut bonuses are not guaranteed to be paid.Bonuses reﬂect market performance andother factors, such as the costs theinsurance company must meet to run itsbusiness. Once the company has addedannual bonuses, they are ‘locked in’ andnormally can’t be taken away.The company usually tries to balanceperformance over the long-term by holdingback some of the gains in good years to payout in poor years. This is called ‘smoothing’returns. One effect of smoothing is thatthere is usually a delay between whathappens in the stock market and the returnsthe fund makes. Both good and bad yearscan have a long-lasting effect on thebonuses added each year.The fund manager will usually add a ﬁnal orterminal bonus when the policy matures atyour retirement date.When returns are bad, the insurancecompany may apply a penalty if youtry to transfer out of the fund. This isoften called a Market ValueAdjustment. You should check ifthe company will deduct anymoney from your with-proﬁtsfund if you decide to transferor to retire earlier or laterthan planned.Types of riskThe most suitable investment for you willdepend on what risks you are prepared totake with your money. This does not justmean whether you are prepared to losesome of what you pay in. There are severaldifferent types of risk you can take byinvesting money.1. Capital risk - the possibility that you’ll losesome of the money you originally invested.This is what most people mean when theytalk about taking a risk with your savings.Stockmarket risk is one example of capitalrisk - the value of investments linked to thestockmarket can go up or down. This meansthat, although the long-term trend tends tobe upwards, at any particular time the
18 19market might have dipped, so yourinvestment could be worth less than you’dpaid. You may need to accept some capitalrisk to offset shortfall risk and inﬂation risk.2. Shortfall risk - the possibility you won’tmeet your ﬁnancial goal.You may be saving or investing money inorder to reach a target amount at some timein the future. A well-known example wouldbe investing in an endowment plan to payoff a mortgage.If you choose investments with no or lowcapital risk, your returns are likely to belower and could fall short of the amount ofmoney you want to target. You also run therisk of a shortfall if you do not reviewregularly how much you are saving.If your investment is falling short of itstarget, you may have to choose whether toreduce your target, increase the amount youinvest, or invest for a longer term.3. Interest risk - missing out on the bestinterest rate.Variable interest rates can fall or rise. Fixedrates lock you in when other interest ratesrise or fall.4. Inﬂation risk - the possibility that, overtime, rising prices reduce the buying powerof your money.This is especially a problem where income ispaid to you out of capital, so the real valueof your capital falls. The solution is usually totake on some capital risk.Financial planning -regular reviewsFirst of all, make sure you understand whatyou already have. If you are in youremployer’s scheme, or are paying into apersonal pension scheme, try to makeyourself familiar with the rules of thescheme and how it works. If you have shiedaway from making sure you understandyour annual beneﬁt statements, now is thetime to read them and ask questions.If you have trouble understanding what yourpension plan means for you, we can helpwork out the jargon. Call our Helpline0845 6012923.Show an interest in your pensionMake sure you know with a personalpension or money purchase type companyscheme what investment vehicle is beingused for your monies and make sure you arecomfortable with the level of risk chosen.Check you know about any old policies orschemes you joined with old employers. It issometimes the case that people lose contactwith their old employers and do not realisethat they have pension beneﬁts held underan old scheme that they may have forgottenabout. The pension scheme will havedifﬁculty in contacting you if you do notinform them of your latest address. This canbe further confused by any change of nameon marriage, divorce or remarriage.All active pension schemes are obliged tolodge details of their address and otherinformation with the Register of PensionSchemes, which was set up in 1991. ThePension Tracing Service can check theRegister to locate contact details for yourpension. (But note: the Register does notcontain details of the amount of yourpension beneﬁts.)Their address is as follows:The Pension Tracing ServiceThe Pension ServiceTyneview ParkWhitley RoadNEWCASTLE-UPON-TYNENE98 1BATelephone: (0845) 600 2537You will need to bring together anydocumentation you may have relating to thescheme. You ﬁrst of all write to the lastknown address of your old employer. If thisdoes not work, you can contact the TracingService, or alternatively the PensionsAdvisory Service, for an enquiry form PT1,which is a request for information on apension scheme. You should complete asmuch of the form as possible and then sendit to the Tracing Service. They may then beable to give you an address where you willbe able to contact the scheme authorities.If this is unsuccessful, you may also considerthe feasibility of making contact with ex-colleagues from the time you were amember of the scheme. It quite oftenhappens that other people haveexperienced the same problems and may bein possession of helpful information. If youare not in direct contact with any of thesepeople, then you could try placing apersonal advertisement in an appropriatelocal paper, with a request for information.Topping up your pensionOne of the ways in which you can ‘top-up’your company pension arrangement is bypaying into an Additional VoluntaryContribution (AVC) scheme. These are runby the employer, who in some instancesmay pay all of the administration costs,which will, of course, be very beneﬁcial to ascheme member. The majority of AVCschemes are money purchase schemes,which means that your AVCs are invested,usually with an insurance company, to buildup a fund.‘In-house’ AVC schemes frequently beneﬁtfrom no cost or low cost administrationcharges as the trustees can negotiate thesewith the provider of the AVC arrangement.Contributions payable to AVCs enjoy thesame tax concessions as the main schemecontributions. Other advantages ofcontributing to an AVC scheme are that itgives the opportunity to make good anyshortfall in pension beneﬁts brought aboutby breaks in service, early retirement etc;and funds from voluntary contributions areexempt from income tax and capital gains tax.You may be able to take up to 25% of yourAVC fund as tax-free cash, as long as yourpension scheme’s rules allow this.From April 2006, schemes will no longerhave to offer an AVC option. If your schemecloses its AVC plan, you can explore otheroptions to top up your pension, such aspaying into a personal pension plan orstakeholder plan.If your scheme allows you to buy ‘addedyears’ (salary-related schemes only), youcould increase the number of years serviceyou have built up within your main schemeand therefore increase both the amount ofpension that you will receive and any tax-free cash lump sum available on retirement.Check what options your scheme offers fortopping up your beneﬁts.
20 21Reviewing plans if yourcircumstances changeChanging jobsIf you belonged to your former employer’soccupational pension scheme you will nolonger be able to contribute to the scheme.But, provided you have belonged to thescheme for at least two years, you will havethe option to:• transfer the pension beneﬁts you havebuilt up to a new scheme (if there is one,but ﬁrst check with the scheme rules andwhether it is to your advantage totransfer - it may not be) or• leave the pension rights you have builtup in the scheme (called a ‘preservedpension’ or ‘deferred pension’) to betaken when you eventually retire.However, if you have belonged to such ascheme for at least three months (but lessthan two years) you will have the followingoptions:• transfer your pension beneﬁts to a newscheme• take a refund of your own contributions(less tax and any deductions forcontracting-out).In the case of a salary-related pension, a‘preserved pension’ is increased to protectagainst inﬂation between your leaving youremployment and retirement. If it’s a moneypurchase pension, it can be left to carry ongrowing, as before. Growth will depend oninvestment performance and annualcharges.If you have a personal or stakeholderpension, there is no need to stop payingyour contributions or transfer your planwhen you change jobs. However, if yourformer employer paid into the pension onyour behalf, these contributions will stop.If you decide to stop paying into a personalpension, you can leave the pension fundyou have built up to carry on growing, butcheck whether there are extra charges formaking the plan ‘paid up’. You should alsocheck the effect that annual managementcharges may have on your fund. You cangenerally stop and start contributions to astakeholder pension without incurring anyextra charges.If the new employer offers an occupationalpension scheme, joining it may be to youradvantage. Ask the scheme administratorfor details of the scheme. If the newemployer offers a Group Personal Pensionscheme or stakeholder pension, checkcarefully whether you will be better offjoining it than keeping your present pensionarrangements.Don’t stop a personal pension or transfer itwithout getting advice ﬁrst. You may not yethave paid a large part of the charges dueover the life of the plan and may well losemoney if you stop the plan now.Transferring your pension potsIf you have paid into a company pensionscheme for at least a minimum period (seethe previous section), you have the right totransfer your pot to another arrangementthat will accept it.Before you decide whether to transfer, youneed to ﬁnd out two things: what beneﬁtsyour former employer’s pension schemewould provide you with and what you willget out of transferring those beneﬁts toanother scheme.If you are looking to transfer a salary-relatedpension, the scheme will put a value on yourbeneﬁts. There is no guarantee that thevalue will provide you with beneﬁts in thenew scheme that are the same as you had inthe old scheme. For example, this value maynot take account of any beneﬁts that are atthe trustees’ discretion.If you transfer from one salary-relatedpension scheme to another, you might beoffered either ‘added years’ in the schemeor a ﬁxed pension paid from normalretirement age. If you transfer from a salary-related pension scheme to any type ofmoney purchase pension (company,personal or stakeholder), you give up thepromise of a ﬁxed level of pension income.What you get instead is a pension whosevalue depends on how well the investedmoney grows and how much it costs to turnthe pot into an income at retirement.Transfer values from both company pensionschemes and personal pension schemes canbe subject to change over time. The transferprocess is not always straightforward andany delays can lead to transferring adifferent amount than you ﬁrst thought wasavailable.If you transfer from an underfundedscheme, the trustees can reduce yourtransfer value to reﬂect the overall shortfallin the scheme.For more information on what is involved ina pension transfer, read the FSA’s Guide tothe Risks of Salary-related OccupationalPension Transfers, which you can get fromthe FSA Consumer Helpline 0845 606 1234.Or read our own booklet, ‘Transferring yourpension to another scheme’, which you canobtain from our helpline 0845 601 2923.
22 23Retiring earlyChoosing to retire early is an expensivedecision. Your pension will have had lesstime to build up and must be paid out forlonger. If you do not want to retire on a lowincome, you need to save extra to affordearly retirement.Retiring early from an occupational pensionscheme is usually only possible if thescheme rules allow.You can currently retire at 50 from apersonal or stakeholder pension but this isgoing up to 55 by 2010. If you decide toretire earlier (or later) than your proposedretirement date, you should check with thepension provider whether they will deductany money from your pension fund (if it’s awith-proﬁts fund) called a ‘market valuereduction’.If you are made redundant, you may beoffered a good pension as part of theredundancy package. Consider carefullywhether you want to start taking yourpension straight away or leave it to carry onbuilding up until a later date. Take care thatin many circumstances early retirement maynot be offered outside the immediate periodof the redundancy, or if it is, the terms arenot as good.DivorceYou need to be aware that your pension rightscould be affected by divorce. The court isrequired to take the value of any pensionheld by either party to a divorce into accountwhen the ﬁnancial settlement is beingdetermined. There are three options availableto the court when it comes to decide howthe value of a pension should be treated.Pension Offsetting(possible since 1 January 1974)Offsetting is widely used. It involves simplyoffsetting the value of pension assets againstother ﬁnancial assets, so that the party withthe pension keeps it and the party without apension is allocated other ﬁnancial assets inlieu of pension. Offsetting is usedparticularly in cases where there arechildren to be considered. For example, thespouse who keeps the children may alsokeep the matrimonial home, which could beoffset against the value of pension rights.This approach achieves a clean break but isimpractical in some cases.Pension Earmarking/Attachment(possible since 1 July 1996)The Pensions Act 1995 permits courts tomake Attachment orders in addition toﬁnancial orders for deferred maintenance.These orders are sometimes known as‘earmarking’ orders. An attachment orderrequires the trustees or managers of apension scheme to pay part of a member’spension when it becomes payable direct tothe former spouse on the member’s behalf.Attachment orders can be made againstperiodical payments or lump sum paymentsof pension or death in service lump sums.Attachment orders can only take effectwhen the member’s pension comes intopayment.In Scotland, ﬁnancial orders for deferredmaintenance can only be made against lumpsum payments of pension or death in servicelump sums. If the court orders the pensionscheme to make payments on behalf of themember these orders are called earmarkingorders. In Scotland the court cannot makean earmarking order against periodicalpayments of pension.Pension Sharing(possible since 1 December 2000)Pension sharing enables the value of onespouse’s pension to be shared with theother spouse. If the court makes a pensionsharing order the value of the member’spension is reduced by the percentageordered by the court. The trustees or themanagers of the member’s pension schemeare responsible for depositing the amountdeducted from the member’s pension in asuitable pension scheme for the formerspouse. In some cases the former spousemay have the option of securing pensionrights within the scheme operated by theex-spouse’s employer. In most casespension rights are bought in a differentpension scheme. Pension sharing enables a‘clean break’ to be made. Once themember’s pension has been debited and apension secured for the former spousethere need be no further contact betweenthe couple for pension purposes.Although offsetting and earmarkingcontinue to be used, the number of pensionsharing orders is steadily increasing.However, it should be noted that pensionsharing is not mandatory and in some casesis not suitable.The method chosen will have a direct effecton your retirement provision. You shouldtherefore ensure that your solicitor makesyou aware of the implications.It is also beneﬁcial to obtain independentﬁnancial advice. For example, the pensionearmarking option does have somedrawbacks. The date of drawing the pensionremains in the hands of the spouse with thepension. If you are not the one with thepension, you will have no control over itstiming; you only have a right to part of the
24 25payments due to your ex-spouse, when theybecome payable to him/her. As the pensionremains his/her property it will cease whenthey die and would not even commence ifthey died before it was due to start. Inaddition, you would not be covered underthe law on providing information, so youmay not know what the pension will amountto until it is paid out. This could causeproblems if you and your ex-spouse are notin contact after the divorce.Under the pension sharing provisions, thereis sometimes the option for the spousewithout a pension to become a member ofthe other’s occupational pension scheme.Not all schemes allow this and insteadprovide a transfer to another pensionarrangement (you will have this optionanyway). If you are not the spouse with thepension and you choose to remain in yourex-spouse’s scheme, you would become apension credit member. This is a separatecategory of pension scheme member. Youwould not have the same rights as membersof the pension scheme who earn theirpension by length of pensionable serviceand/or payment of contributions but youwould be treated the same as other pensioncredit members of the scheme. You need toascertain what would be the better optionfor you, stay in the scheme or transfer toanother one.Pension sharing immediately reduces thepension entitlement of the spouse with apension and immediately boosts the otherspouse’s rights. Call our Helpline 0845 6012923, if you need further information.Looking ahead to whathappens at retirementIf you are in a salary-related pensionscheme, you can expect the companypension scheme to pay you a regular income(usually monthly) and possibly a lump sumsoon after you retire.The size of the lump sum available dependson the scheme’s rules, but in any event willgenerally be limited to 25% of the total valueof your pension (under HM Revenue rules).If you have been saving in a moneypurchase pension scheme, when you retireyou are going to need to convert yoursavings into an income. There are four waysto do that:1. take a pension from your scheme(occupational schemes only)2. buy an annuity from your provider3. buy an annuity from another provider4. set up an Income Drawdownarrangement.AnnuitiesThe amount of income that your pensionfund can buy is determined by annuity ratesat your date of retirement. Annuities areessentially insurance contracts, under whichyou hand over your pension fund to aninsurer in return for an income.For example:Value of fund x Annuity rate = AnnuitySo, if you have a fund of £100,000 and theannuity rate applicable for your age is £6 ofpension per £100 saved, you will receive anannuity of £6,000 a year.Actuaries calculate annuity rates usingvarious factors - chieﬂy, gilt yields and lifeexpectancy, although age, gender andsometimes health play a part. In generalterms, annuity rates are higher the older amember is and if the member is a man(because men have a shorter lifeexpectancy).Gilt yields (interest paid on governmentbonds) have been falling, while lifeexpectancy is on the increase. This meansthat your pension fund will not stretch as fartoday as it would have done, say, tenyears ago.Types of AnnuityThere are many different types of annuitiesto choose from and the following are themain types:• Level Annuity - pays the same incomeyear after year for the rest of your life• Increasing Annuity - pays an income thatis designed to increase each year eitherat a ﬁxed rate or in line with the RetailPrices Index• Investment-linked Annuity - this linksyour income to the ups and downs ofthe stockmarket. Investment-linkedannuities can boost income, but you willnot have the certainty of a ﬁxed income• Term Annuity - can be used as part ofIncome Drawdown (see page 26). Pays aﬁxed amount of income over a term (upto 5 years). Term annuity counts towardsthe maximum income withdrawalallowable under income drawdown upto the age of 75. All term annuities mustend by age 75• Capital-protected Annuity - returns theoriginal capital (the pension pot atretirement), less annuity paymentsreceived, in the event of the annuitant’sdeath before the age of 75. Theproceeds are payable less 35% tax. Thecapital guarantee may mean the annuityrate is lower than without any capitalguarantee.In addition, enhanced annuities are availableto those who have a shortened lifeexpectancy due to poor health. These areknown as ‘impaired life’ annuities.Unless the annuity derives from contracted-out rights, all of these annuities can beprovided on a ‘single life’ or ‘joint life’ basis.A single life annuity pays out only during theannuity-holder’s lifetime. A joint life annuitypays out until the second person dies.Get aforecast ofyour statepension
26 27You may also choose an annuity with aguarantee period. These guarantee to payout at least 5 or 10 years’ worth of income ifyou die within this period. This income maybe paid until the end of the guaranteeperiod or if the maximum period is 5 years,paid as a lump sum, but not if death occursafter age 75.Guarantee periods, however, should not belooked upon as a substitute for joint lifeannuities. You may live till the end of theguarantee period and then your survivors willnot get this beneﬁt. Note that any lump sumspaid out under a guarantee may be taxed.Pension Income DrawdownPension Income Drawdown and PhasedRetirement, which is a variation using bothpension drawdown and annuity purchase,are highly complicated options and youshould not consider them without takingsuitable ﬁnancial advice.With Drawdown, you choose the incomeyou wish to take from your investments, butput off the purchase of an annuity (but notbeyond age 75). Instead, the income youdraw comes directly out of your pensionpot; it does not depend on annuity rates.You have to choose an income within a rangeprescribed by HM Revenue. The minimumis £0 per annum, and the maximum is 120%of the annuity you could have purchasedimmediately instead, based on rates set bythe Government Actuary’s Department.You keep the rest of your pot invested - ifthe pension fund is invested in equity-basedinvestments, you must be prepared forsome volatility in the fund in the future.Annuity rates tend to be higher the olderyou are (reﬂecting the shorter period theannuity will have to paid out for). However,annuity rates in general can rise and fall. So,it is possible that by delaying a pensionannuity you might not eventually purchasean annuity at a better rate.Phased RetirementThe concept behind Phased Retirement isthat a pension fund is split into a number ofequal segments or policies (often 1,000) andthe individual can take beneﬁts from eachsegment separately.This enables an individual to phase-in orstagger the purchase of annuities over aperiod (currently up to age 75).Some of the advantages of phasedretirement are:• you can choose your level of income,and only cash-in the policies needed toproduce it• the pension fund not cashed-in remainsin the phased retirement plan andcontinues to be invested, potentiallyproviding higher future income• as you get older there is the prospect ofannuity rates rising, providing you with ahigher income, although this is notcertain to be the case when you retire• the remaining pension fund, being thepolicies not cashed in (or ‘vested’), cannormally be returned to the individual’sbeneﬁciaries free of Inheritance Tax onhis or her death.TakeprofessionaladviceIt is important to note that the pensionprovider that has been investing a member’sfund is not always the one offering the bestannuity rates. Members should considertaking advantage of the Open MarketOption (OMO). This involves searching themarket place for the best possible annuity.An independent ﬁnancial adviser (IFA) maybe able to assist in doing this.
28 29The disadvantages include:• there is no guarantee that your incomewill be as high as taking an annuitystraightaway with your total fund or thatit will beat the best rate on the openmarket• the returns provided by gilts may dropover time, lowering annuity rates• the value of the continued investment ofyour pension fund may go down as wellas up• annuity providers make a proﬁt from thefact that some individuals die soonerthan is expected. They utilise some ofthis ‘mortality proﬁt’ to enhance currentannuity rates. Your remaininginvestments need to enjoy better returnsthan the mortality proﬁt margin to makeyou better off• you may not know from year to yearwhat your actual income will be.Both pension drawdown and phasedretirement will require a fairly large initialfund value in order to make it worthwhile,usually in excess of £100,000. They are alsomore suitable to people who continue tohave other income sources to rely on suchas working part-time or other income.Always askquestionsThe Pensions Advisory Service operates twowebsites. One that deals speciﬁcally withstakeholder pensions -www.stakeholderhelpline.org.ukand the main website -www.pensionsadvisoryservice.org.ukthat deals with all other aspects of pensions.