Types of Pensions

/Types of Pensions
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Anyone who has worked and paid the requisite number of National Insurance (NI) contributions over a specified number of years should be entitled to claim the basic State Pension.

Your entitlement depends on the number of years that you have worked and the amount of NI contributions that you have paid. To be entitled to a full basic state pension you must have been credited with ’30 qualifying years’ of NI contributions.

The full basic State Pension is currently £107.45 per week for a single person and £171.85 for a married couple.

Until April 2002 the State Earnings Related Pension (SERPS) was the government’s additional pension scheme. Anyone earning over £75 a week and not ‘contracted out’ would have been building an additional pension under SERPS – which is now called the State Second Pension. However, people who made contributions before April 2002 will receive an additional pension based on SERPS contributions.

Why was SERPS replaced?

The Government replaced SERPS with the State Second Pension because it wanted to give disabled people and those with long-term illnesses the chance to benefit from an additional pension scheme.

A SIPP is a Personal Pension Scheme which gives you the control and flexibility to make your own pension investment decisions, through a wide choice of investment options. It enables you to choose where and when to invest and the length of investment. Contrast this with a conventional personal pension which generally involves the plan holder paying money to an insurance company, for investment into an insurance policy, potentially limiting the choice for the plan holder.

SIPP investors may make choices about which assets (investments) are bought, leased or sold and decide when those assets are sold, subject to the agreement of their SIPP trustee (usually the SIPP provider).

Permissible investments include, but are not necessarily limited to the following:

  • Equities, Unit Trusts and similar investments
  • Discretionary Fund Managers
  • Execution Only Stock Trading Accounts
  • Gilts & Bonds
  • Fixed Term Deposits
  • Fixed Income Securities
  • Unlisted Shares
  • Unregulated Collective Investment Schemes
  • Property Funds
  • Commercial Property
  • Land
  • Apartment Hotel Rooms

SIPP are only suitable for individuals with the resources to take an active and regular interest in their investments.

Employer Pension Contributions into a SIPP

Many employers will contribute into a SIPP. Contributions can be made by paying a lump sum or making regular contributions via a standing order.

A SSAS (Small Self-Administered Scheme) is an Occupational Pension Scheme set up under trust with fewer than 12 members.

Historically, a SSAS required a professional trustee, known as a Pensioner trustee – a requirement that no longer exists. The choice of an independent trustee is important as they very often act as scheme administrator. The majority of SSAS schemes are set up for the executives of director – controlled companies.

SSAS schemes members are able to access the same full range of investment choices that may be held within a SIPP.

A defined benefit (or final salary scheme) is one that promises to pay out an income based on a pre-agreed percentage of your earnings in the year that you retire.

Unlike defined contribution (DC) pensions, the amount the amount that you receive on retirement is guaranteed and paid direct to you. With this type of pension you won’t have to purchase an annuity.

There are two types of defined benefit (final salary) schemes:

  • Final salary schemes based on how much you’re paid when you finally retire.
  • Career average schemes, based on an average of your salary over your career.

The gradual reduction in available defined benefit schemes (due to several factors) has led to a growth in defined contribution schemes.

“These pensions are also known as ‘money purchase’ arrangements and now fill the bulk of the UK pensions sector, covering a wide variety of both private and occupational schemes”.

Source: the tax guide.co.uk

In a Defined Contribution Scheme the employer, employee or both make regular contributions.

Stakeholder pension schemes were introduced in the UK in April 2001 to encourage low to moderate earning individuals to save for retirement. Employers with five or more employees are required by law to provide access to a stakeholder pensions scheme for their employees unless they offer a suitable alternative.
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