Pension planning can be complex. Each person’s circumstances are different. The jargon is difficult to understand and there are a perplexing number of pensions to choose from. In addition, pensions have been the subject of scandals and market devastation, which haven’t exactly inspired confidence or encouraged people to consider planning for retirement. Whilst these factors may be off-putting, it is essential to start making your pension provision as early as possible. Here are some of the things you will need to consider.

TYPES OF PENSIONS
There are three main types of pension: state, occupational and personal.

THE STATE PENSION

This comprises two parts: a basic state pension, which everyone is entitled to receive, and for those people who are employed, the State Second Pension (S2P).

Basic State Pension
To qualify for the basic State Pension you need to build up enough 'qualifying years' before you reach State Pension age. A qualifying year is a tax year in which you have sufficient earnings upon which you have paid, are treated as having paid or have been credited with, National Insurance contributions (NICs).

• If you retire after April 2010 you will need 30 qualifying years for a basic state pension.
• Depending on how many qualifying years you have you'll get a basic State Pension of between £23.81 and £95.25 pw for a single person and £152.30 a week for a couple. These are for 2009-2010. If you don't have enough qualifying years, you'll receive a smaller basic State Pension, or you may not receive any at all.
• If you don't work or if you earn less than the annual National Insurance lower earnings limit (for 2009-2010 this is £4,940 if your employed or £5075 if you are self employed), you can still build up an entitlement if you:
• look after a child aged six or less, and you are the person who claims and gets Child Benefit 
• or you take care of someone who is ill or disabled, and you qualify for Home Responsibilities Protection. 

You can complete a BR19 form to get an up to date projection for what pension you might receive from the state. This can be obtained from the Department of Work and Pensions.

State Second Pension (S2P)

• S2P replaced SERPS in 2002 – the maximum amount payable is depends on your NICs history and when you retire. To qualify for the maximum pension from SERPS, a woman must have worked for 40 years and paid NICs throughout her career.
• The government does offer individuals the opportunity to ‘contract out’ of S2P by electing for their employer’s and their own NICs to fund a personal pension instead. The general consensus now is that contracting out is rarely beneficial for women of any age. If you are thinking about contracting out, it is important to take professional advice before making a decision. 

OCCUPATIONAL PENSION

There are two types of occupational schemes - a final salary or a money purchase scheme.

Final Salary
In a final salary scheme your pension will depend on the level of your salary just before retirement and how many years you have worked for the company. A typical scheme requires you to have 40 years service to obtain the maximum pension, which will be based on two thirds of your final salary. This type of scheme also ensures you know the likely pension you will receive at retirement. And it may provide additional benefits such as an increasing pension, dependant’s benefits and life cover.

If you are not entitled to the maximum pension you should consider making additional pension contributions. For instance, if you were a member of such a scheme for only 20 working years and your final salary was £36,000, you could expect to retire on a pension of only £12,000. Most schemes provide the option of buying added years or contributing to an additional voluntary scheme (AVC).

There has been a lot of concern about the stability of some occupational pension scheme and the funding deficit. Going forward, the Government has introduced protection for scheme members and a compensation scheme so this should not be too much of an issue. For existing scheme members, it is best to get independent financial advice on your scheme funding and your own position.

Money Purchase
In a money purchase scheme your income in retirement is based on the amount that has accumulated in your pension fund. It is largely dependent on the level of contributions, the investment performance, the changes of the scheme and the rates for converting a pension fund to an income on retirement.

There is no cap on the amount of pension you can now receive, however there is a cap on the amount you can accumulate in your pension pot. In general, you can now contribute up to a maximum of 100% of salary per annum (up to £245,000 per annum) into your pension and accumulate a pension pot of £1.75m across all your schemes. However, many schemes will still only allow you to contribute to a maximum of 15% of your salary.

In general, few women retire on an adequate, let alone maximum pension, so you may wish to supplement your company scheme by paying additional voluntary contributions (AVCs) into your employer’s scheme, or making contributions into a personal pension with an external pension provider. In some instances you may be able to buy ‘added years’ in your employer’s pension scheme.

You can normally contribute up to 15% of your total salary (including your taxable benefits) into an AVCs or to buy added years though you can contribute much more into a personal pension arrangement (up to 100% of your salary to a maximum of £245,000 including any contribution to your employer scheme). The 15% ceiling will usually include contributions you may already be making into your company scheme. Each method of ‘topping up’ has advantages and disadvantages, so you should seek independent advice before making your decision.

It is particularly important to think about making additional contributions if you have had a career break or have changed jobs frequently.

PERSONAL PENSION PLAN

If you are self-employed or your company does not provide a pension scheme you will need to think about providing your own pension by paying into a personal pension plan (PPP). There is no limit on the benefits that are payable in retirement but there is a limit on the amount you can pay in (100% of your salary to a maximum of £245,000 each year) and there is an overall cap on the amount you can accumulate in your pension pot (£1.75m).

It is never too soon to start paying into a pension because you get far better value from the contributions you make while you are younger, as your investment will have more time to grow. For instance, if you pay regular contributions into a PPP throughout your 20s, 30s, 40s and 50s, the money you paid in your 20s will account for at least 50% of the pension you receive at retirement!

Most personal pension are very flexible and cost effective these days - you can make monthly or lump sum contributions, you can stop and restart payment (without any penalties) and you can invest in a large number of funds. If you are employed, but not a member of an occupational scheme, your employer can also make payments into your PPP for you.

Pension Planning Tips

The state retirement age is now 65 for women and to qualify for the maximum state pension, you have had to make national insurance contributions for 40 years. There is talk of the retirement age increasing to 67 in the not too distance a future. Thus for most of us, this is not going to be sufficient for our needs in retirement and you should make additional provision

If you are employed and eligible to join a final salary scheme, then it highly likely to be your best option. If you eligible to join a Money Purchase or Group Personal Pension scheme where your employer is making a contribution, then it is still likely to be your best option.

If your employer does not contribute to a pension scheme, then consider setting up a Personal Pension – these are very flexible and cost effective. However, like any investment these should be reviewed regularly to ensure your investment fund is performing well. Even if you are not earning, you can pay £3600 gross (or £2808 net) per annum into a personal pension.

If you have frozen pension from previous employers or a personal pension, you should receive annual statements to give you an idea of what you might at retirement. If you have lost touch, you can trace a pension through the Pension Tracing Service can usually help. You can call them 0845 6002 537.

Finally, the earlier you start contributing to a pension, the less you will need to pay into the plan – as a rough rule of thumb for every 10 year delay, you will need to double your contribution rate. So be good to yourself and start a pension as early in your 20’s as possible.

Addidi Wealth provide a pension planning service for women and access to low cost SIPPs (self invested personal pensions). Contact on on info@addidiwealth.com or 0207 060 1200


This service is provided by Addidi Wealth Ltd who is authorised and regulated by the Financial Services Authority