The most important financial decisions you’re likely to make in your
life are those concerning your retirement. To have a secure future with
a comfortable standard of living after you’ve stopped working, you’ll
need to plan your finances carefully.
Pensions are becoming more and more important as people now live longer
into their retirement. Lifestyles have also changed – people often take
out mortgages later in life than they used to, meaning that they may
still have a mortgage to repay when they stop working. And as people
are experiencing better health and longer retirements, they want to
have a reasonable disposable income in order to enjoy more leisure
activities in their later years.
This is the first of two guides outlining the fundamentals of pensions.
It’ll help you understand more about state pensions and how they are
calculated. The second guide focuses on private pension schemes. These
articles do not constitute financial advice and should only be used as
an introductory informational guide to pensions. For advice on how to
plan your finances for your future, seek professional advice from an
independent financial advisor.
Definition
First, back to basics – what is a pension? It’s a regular source of
tax-free income for you to live on when you retire. As contributions
towards your pension fund during your working life also receive tax
relief, it’s a more tax-efficient than other methods of saving.
The government department responsible for managing and administering
state pensions and other pensions related benefits is The Pension
Service, which is part of the Department of Work and Pensions.
State pension
The government provides a state pension, which can be claimed by men
over the age of 65 and women over the age of 60 (although this will
increase to 65 in line with the male pension age by 2020).
Not everyone qualifies for a state pension, and even those who do will
receive different incomes depending on their working history.
Entitlement is calculated according to the number of national insurance
contributions (NICs) you (or your partner/spouse) have paid, which are
converted into ‘qualifying years’. You’ll need to have worked and paid
contributions for around 90% of your adult working life in order to
receive the full state pension. If you’ve been out of work for long
periods in order to bring up a family or look after someone, you’ll be
compensated for missing NICs through ‘Home Responsibilities
Protection’. If you’ve been out of work for other reasons and have been
claiming benefits such as jobseeker’s allowance, or income support, the
government will have paid your NICs on your behalf for the period(s) in
which you claimed benefit. The minimum you need to get the basic state
pension is 25% of the qualifying years. If you have anywhere between
the minimum and maximum amount of qualifying years, the amount you
receive in your state pension will be adjusted in relation to how many
qualifying years you have, so the more you have, the better. Those who
have less than 25% of qualifying years won’t be able to claim any state
pension at all, although there are other government pension benefits to
assist those on low incomes in retirement, such as pension credits or
the Over 80 pension.
Additional state pension schemes
In addition to the basic state pension, the government has a top-up
scheme to enable people to increase the amount of pension income they
receive.
SERPS (State Earnings-Related Pension Scheme)
Until April 2002, SERPS was the government’s second pension scheme,
which allowed anyone earning more than £75 per week to make
additional NICs. The level of NICs paid was earnings-related. However, the
government deemed SERPS unfair on people with low incomes and those
with big gaps in their employment history, so it was crapped and
replaced with the Second State Pension in 2002 with the aim of allowing
everyone to save more for their retirement.
SERPS gave the option of ‘contracting out’, which could be done for one
of two reasons: in order not to pay the additional NICs, or to put the
additional NICs towards a private pension fund.
Second State Pension
People who were paying into SERPS will now be paying into the second
state pension and may therefore receive their additional state pension
from two different sources when they retire.
The Second State Pension is still linked to earnings. However, it’s
calculated in a way that provides better support to those on low
incomes, or people who don’t have constant work because of illness or
disability. In these cases, the government tops up their credits to a
flat rate of £12,100, so they will receive NICs as if they had
earned an annual salary up to this amount.
As with SERPS, it’s possible to ‘contract out’ of the Second State
Pension, either to stop paying the additional NICs or to put them
towards your own pension fund.
Finding out how much your state benefits are worth
To help you plan your savings towards your retirement, the government
offers state pension forecasts to let you see how much you’ll be likely
to receive as retirement income. Visit the Government Pensions Service
website for more information (www.thepensionservice.gov.uk).
Source: http://www.ArticlePros.com/author.php?Benedict Rohan
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