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Home » Business And Finance Articles » Pensions Guide Private Pensions

Pensions Guide: Private Pensions

It's now unlikely that the state pension will be enough to keep you living comfortably when you retire. It provides only basic support, and the government itself is keen to encourage people to save as much as they can to supplement their state pension and give themselves a comfortable income in retirement. Combined with better health in the general population â€" meaning longer life expectancies â€" and dwindling stock market returns over the last decade or so, the so-called 'pension crisis' is a call to action for people to plan their finances carefully and put more and more cash aside to ensure a safe and secure future for themselves.

This article is the second of two guides examining the fundamentals of pensions. The first guide focuses on state pension provision, while this one outlines some of the possibilities for making personal pension arrangements. They are intended for information only and do not constitute financial advice. It is recommended that you speak to a financial advisor for professional advice on planning your finances for retirement.

Saving for the future

There are lots of ways in which you can save for the future â€" savings accounts, stocks and shares and property investment, for example.

However, all of these are subject to tax. Pension schemes are much more tax-efficient as tax relief is given on contributions made and the income they provide during retirement is tax-free. This is why pensions are a common way of saving for retirement.

There are two main types of personal pensions â€" final salary and money purchase. The first can only be provided through occupational schemes, but the second can be purchased privately on an individual basis.

Final salary

Final salary schemes, also known as defined benefit schemes, provide a guaranteed income based on a percentage of salary earned during your final year of work as well as length of service with the company. It's possible to retire on up to two thirds of your final salary.

As it guarantees to provide a certain level of income, it's often considered to be the best type of pension scheme available. However, there has been a decline in the number of employers offering final salary schemes in the last few years because of the expense of maintaining them. Falls in the stock market have seen many pension investment funds drop drastically in value, meaning that the employer must make up the difference in order to provide the guaranteed income to the scheme's members. Another expense for employers with final salary schemes is the 10% tax levied on dividends, a measure introduced by the government in 1997, which again can have a detrimental impact on the size of pension funds.

Money purchase

With money purchase schemes, also know as 'defined contribution' plans, members make payments into a fund which is then invested into the stock market. On retirement, the accumulated funds are used to buy what's called an annuity, which provides a regular retirement income. The amount you'll receive in retirement isn't guaranteed â€" it depends on how well the stock market has performed and on annuity rates at the time that you take out your annuity. Whereas final salary pensions put the burden of risk on the employer, who must make up the amount to a guaranteed level, it's the member who's responsible for the risk of a shortfall in money purchase schemes. Members may therefore need to save more cash independently to ensure they'll have a comfortable retirement.

You'll have some flexibility to choose what funds your money is invested in, and your decisions will depend on your attitude to risk.

Higher risk investments can provide much greater potential returns, but at the same time can also make the biggest losses. 'Safer' investments will reduce the risk of losses but will not be likely to yield as big returns as higher risk investments.

Annuities

An annuity is a fixed, regular amount of money paid to someone, usually for the rest of their life, which is purchased using a lump sum from a pension fund, for example. It's invested in the stock market, usually in funds considered to be safe. Annuity rates have plummeted in the last decade, meaning that many people are now expecting lower annuity incomes and are having to change their retirement plans. However, there are various different options when it comes to annuities. Members aren't obliged to take out the annuity offered by their own scheme â€" they can use their accumulated pension funds to buy an annuity from any annuity provider on the open market, where they may be able to get a better rate. It's also possible to take up to 25% of the pension fund as a tax-free cash lump sum, leaving the other 75% to purchase an annuity. A third option is to take out a short-term annuity of up to five years to keep your pension invested for a little longer in the hope that it will increase in value to allow you to purchase a better lifetime annuity further down the line. Another way of delaying taking out an annuity is to receive an income directly from your pension fund, keeping it invested in the hope of gaining higher returns to sustain the income received. However, the value of the funds could fall just as easily as they could rise, which may leave you worse off. This option is known as an 'unsecured pension using income withdrawal'. Finally, it's possible not to purchase an annuity at all and instead receive an income directly from your pension fund from the age of 75 with an 'alternative secured pension'. Before 2006 it was a legal requirement to purchase an annuity from pension funds by the age of 75, but the law changed to allow people over 75 to receive this type of income instead, although the total amount of income that can be drawn down from it is 70% of a lifetime annuity. It's intended for people who are opposed to purchasing annuities on ethical grounds as a result of their religious beliefs.

Stakeholder schemes

Stakeholder pensions were set up by the government in 2001 with the aim of facilitating access to personal pensions for people whose employers don't run occupational schemes. As with money purchase plans, stakeholder pensions invest in the stock market, bonds and cash savings accounts and accumulate funds which are used to purchase an annuity upon retirement. They're designed to be easy to understand, flexible and lower cost than other pension plans. The maximum charge that administrators will be able to charge each year for managing the funds is 1% of the value of the fund, and they cannot charge penalties if members wish to transfer cash in or out or stop contributing. However, there's a limit to the amount that can be invested, so they're designed for people on low to middle incomes rather than high earners.

And here is another random article you might be interested in...

Terrorism: Acts of Terrorism: When will Insurance Respond?

Insurance policies provide financial protection in a broad range of circumstances but each type of product specifies certain situations where the policy will not respond. These vary from one type of product to another, and can vary in detail between one insurer and another. It is important to check the details of your individual policy. However the questions and answers below seek to set out the usual approach for each of the main types of insurance. If you have specific queries on your policy you should approach your insurer or broker.

Property cover

Will my home be covered if it is damaged or destroyed in a terrorist attack?

Yes. Household, buildings and contents policies include damage by fire, explosion or impact whether caused accidentally, through the malicious act of an individual criminal or in an act of terrorism. This cover will normally include the cost of alternative accommodation whilst your home is being repaired, typically up to a total of 20% of the sum insured. However contamination cover, whether caused accidentally or through malicious or terrorist activity, is excluded under household policies. In these circumstances the consequential costs such as alternative accommodation would not apply either.

Some blocks of flats are insured under commercial, rather than household, policies. Under these policies terrorism damage is covered if the specific top-up cover readily available in the market has been taken up. This can be arranged either at the date of renewal, or added to the policy mid-term. This cover will normally include chemical, biological, radiological or nuclear contamination caused by terrorist activity. You should speak to your broker or insurer to obtain a quote and information on how to buy this additional cover.

Why isn't contamination cover included on Household policies?

Contamination has been a standard exclusion on household policies since the 1960΄s as the likely aggregation of claims (many homes will be affected by a single incident) and cost of clean-up could not be met by insurers without putting their financial viability at risk. This would not protect the interests of other policyholders. The additional cover available to commercial properties is only possible through the Pool Re Scheme, backed by government. However if the contamination is caused by a terrorist attack on premises containing nuclear material insured by the Pool Re Nuclear Scheme, the third party liabilities towards other people's property would be picked up by this specialist insurer.

Is cover available for businesses? What about consequential losses?

Yes. You can obtain terrorism cover as an add-on to your property cover and should ask your insurer for a quote, either at renewal or mid-term if you wish to review your situation. This is available on a competitively priced basis, but is associated with your property policy if obtained through the Pool Re scheme, available via most commercial property insurers. Alternatively some terrorism cover is available on a stand-alone basis through the Lloyds of London market. Commercial property terrorism cover is normally provided on an All Risk basis and includes biological, chemical, radiological and nuclear contamination, and the consequential business interruption losses. However it does not include e-risks, nor losses due to hoaxes.

Why isn't terrorism cover a standard part of commercial property cover?

There is no statutory requirement to have this cover in place. However you should check your contractual requirements, as you may need to put in place such cover to meet your obligations under certain types of contract (for example in leases or loan agreements). You can opt into this cover if you require it by asking your property insurer for a quote and paying the additional premium.

Terrorism: Acts of Terrorism: When will Insurance Respond?

Insurance policies provide financial protection in a broad range of circumstances but each type of product specifies certain situations where the policy will not respond. These vary from one type of product to another, and can vary in detail between one insurer and another. It is important to check the details of your individual policy. However the questions and answers below seek to set out the usual approach for each of the main types of insurance. If you have specific queries on your policy you should approach your insurer or broker.

Property cover

Will my home be covered if it is damaged or destroyed in a terrorist attack? Yes. Household policies include damage by fire, explosion or impact whether caused accidentally, through the malicious act of an individual criminal or in an act of terrorism. This cover will normally include the cost of alternative accommodation whilst your home is being repaired, typically up to a total of 20% of the sum insured. However contamination cover, whether caused accidentally or through malicious or terrorist activity, is excluded under household policies. In these circumstances the consequential costs such as alternative accommodation would not apply either. Some blocks of flats are insured under commercial, rather than household, policies. Under these policies terrorism damage is covered if the specific top-up cover readily available in the market has been taken up. This can be arranged either at the date of renewal, or added to the policy mid-term. This cover will normally include chemical, biological, radiological or nuclear contamination caused by terrorist activity. You should speak to your broker or insurer to obtain a quote and information on how to buy this additional cover.

Why isn't contamination cover included on Household policies?

Contamination has been a standard exclusion on household policies since the 1960΄s as the likely aggregation of claims (many homes will be affected by a single incident) and cost of clean-up could not be met by insurers without putting their financial viability at risk. This would not protect the interests of other policyholders. The additional cover available to commercial properties is only possible through the Pool Re Scheme, backed by government. However if the contamination is caused by a terrorist attack on premises containing nuclear material insured by the Pool Re Nuclear Scheme, the third party liabilities towards other people's property would be picked up by this specialist insurers.

Is cover available for businesses? What about consequential losses?

Yes. You can obtain terrorism cover as an add-on to your property cover and should ask your insurer for a quote, either at renewal or mid-term if you wish to review your situation. This is available on a competitively priced basis, but is associated with your property policy if obtained through the Pool Re scheme, available via most commercial property insurers. Alternatively some terrorism cover is available on a stand-alone basis through the Lloyds market. Commercial property terrorism cover is normally provided on an All Risk basis and includes biological, chemical, radiological and nuclear contamination, and the consequential business interruption losses. However it does not include e-risks, nor losses due to hoaxes.

Why isn't terrorism cover a standard part of commercial property cover?

There is no statutory requirement to have this cover in place. However you should check your contractual requirements, as you may need to put in place such cover to meet your obligations under certain types of contract (for example in leases or loan agreements). You can opt into this cover if you require it by asking your property insurer for a quote and paying the additional premium.