Confused About Pensions

Pensions Unravelled

Thereís been no end of hype surrounding the state of UK pensions ñ the phrase ëpensions crisisí being regularly trotted out.

The latest crisis has focussed on the growing cost of final salary pensions, a type of defined benefit company pension that pays out according to an employeeís final salary and their years of service. A report from KPMG has suggested that many companies are now paying as much on previous employees as they are on current staff. With costs spiralling itís likely that many will be forced to abandon these pension schemes altogether.

With company pension schemes clearly in rocky water, offers some timely tips on the personal pension alternative.

How do personal pensions work?

With a personal pension, you pay a regular amount, usually every month, or a lump sum to the pension provider who will invest it on your behalf. The fund is usually run by financial organisations such as building societies, banks, insurance companies, and unit trusts.

The final value of your pension fund will depend on how much you have contributed and how well the fund’s investments have performed. You can currently draw the benefits from your personal pension at any time when youíre between the ages of 50 and 75. From April 2010 the minimum age will rise from 50 to 55.

Where is my money invested?

Your money will be invested in a very wide range of with-profit and unit linked pension funds offered by the insurance company of your choice. These could range from property funds to cash funds, index tracker funds or emerging markets funds. Itís not even uncommon for pension providers to offer externally managed fund to take advantage of specialist investment houses.

Whatís the benefit?

The fundamental benefit to investing in a personal pension (or indeed any form of pension) is the tax relief offered by the government. For each pound you contribute to your scheme, the pension provider claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every ? you pay into your pension, you end up with ?? in your pension pot.

You may also get tax benefits on the growth of your pension fund and the capital gains on the funds assets. Depending on your provider you may also be eligible to draw out a quarter of your personal pension fund tax free.

Is it for me?

Opting to invest in a personal pension is a major financial decision and whether or not to do so depends very much upon your personal circumstances. Youíll need to consider whether your employer offers a company pension scheme or a stakeholder pension scheme with an employer contribution. If youíre self-employed youíll have to think carefully about the level of contribution you make.

If youíre at all unclear you should consult an independent financial adviser before committing to any scheme.

Click here to compare pensions.

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