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FEATURE:Pension time

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25/01/2008

What options do you have when saving for your retirement? Your Money gives the low down on pensions.

While the thought of retiring might bring a smile to many people’s faces, the thought of preparing your finance for it may not produce quite the same results. According to research from Baring Asset Management, 24 per cent of adults in the UK who are yet to retire, have made no pension arrangements at all. This accounts for more than nine million people.

Rob Lay, spokesperson for Baring, says people shouldn’t be complacent about saving for their retirement. He adds: “People have to start taking a more proactive approach to planning for their retirement. Relying on a Defined Contribution scheme is no longer an option for many UK adults and relying on your property as a pension is a very risky strategy to take.”

Pensions can be a bit tricky to get your head round – there are various different kinds of products available privately from banks and other providers, as well as state provided pensions and an additional scheme currently under discussion by the Government. So what are your options?

State pension

In order to qualify for a state pension, you must have paid National Insurance contributions, that is, worked in the UK, for a set number of years. This set period is 44 years for a man and 39 years for a woman. The age at which you qualify for the state pension is 65 for a man and between 60 and 65 for a woman, with the maximum amount you can receive currently standing at £87.30 per week. You must have worked in the UK for a minimum of 10 years to qualify at all, and if you have not worked for longer than this period you will only qualify for 25 per cent of the basic pension. If you have completed less than 10 years work, you could qualify for nothing.

In 2003, the Government introduced pension credits in order to combat pensioner poverty. Pension credit is a means-tested benefit for low-income earners, and entitles qualifying single people to a minimum weekly income of £119.05 and couples can receive £181.70.

State pension and pension credit payments vary depending on your individual circumstances. For more information, visit The Pension Service.

Personal pensions

If you take out a personal pension, you will still be eligible to receive the state pension, but you will be able to supplement it with the income from your personal one. There are three basic types: stakeholder, standard and self-invested (known as a SIPP). They all differ in the degree to which you have control over your investment and the amount you can afford to save. When you retire, you will be able to take 25% of your savings as a lump sum and the rest is used to purchase an annuity, which is an investment product designed to give an income.

Company pensions

With company pensions (pension schemes run by employers for their workers), there are two main types. Ian Naismith, spokesperson for Scottish Widows, says: “Companies can pay a certain percentage of your salary into a scheme and match any contributions you make into the scheme yourself. This kind of scheme usually depends your pay has varied during your time at the company. There is also the option to have final salary scheme, which means that the pension you get from your employer upon retirement is based on how long you worked for the company and what your salary upon retirement is.”

Personal accounts scheme

In December 2006 the Government released a plan for a new national pension scheme. Personal accounts have been designed to encourage millions of workers to start saving for their retirement.

The scheme will allow UK employees aged over 22 years old and earning more than £5,000 a year to be automatically enrolled in a low-cost pension saving vehicle. Unless a worker specifically requests to opt out of the scheme, 4 per cent of their salary will be put into an account, together with 3 per cent contribution from their employer. Employees who are already members of company pension schemes will not be eligible.

John Glendinning, director of pension development at Prudential, sings the praises of the new scheme. He says: “We currently live in a debt driven culture, so it’s really important to boost the idea that people should be saving for the short to medium term, as well as saving for their retirement. It’s estimated that between 7 and 9 million people don’t have access to a workplace pension scheme, so the scheme offers a fantastic start to those who aren’t saving for retirement at all.”

Ian Naismith, head of pensions market development at Scottish Widows, says that while the scheme is undoubtedly a positive thing in terms of getting people saving for retirement, there have also been some problems. He explains: “The scheme has gained some criticism from employers, who would be forced to pay money into the scheme for each employee, and there are also some questions around the impact the scheme would have on the means tested pension.”

So, it’s pretty clear that when it comes to saving for your retirement, there are plenty of options open to you. As always, seek professional advice if you’re not sure of what product is right for you, and once you’ve found a suitable deal, you can start looking forward to what is, hopefully, a financially secure period of your life. For more info on pensions, click here.

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