Pensions

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The value of pension and the income they produce can fall as well as rise. You may get back less than you invested.

There are two key reasons why saving into a pension can be an attractive way to finance retirement. The first reason is that pension contributions attract a degree of tax relief. The second reason is that those in work-place pensions may benefit from employer contributions.

It should be noted that the exact degree and nature of these benefits is subject to change and may depend on an individual’s specific circumstances. It is, however, fair to say, that there is cross-party consensus on the importance of encouraging people to save money during their working years to pay for their retirement.

That being so, it is reasonable to expect there to continue to be some sort of incentive for people to save. Individuals are, however, advised to make regular checks on specific pensions’ regulations and how they may affect them personally. In particular, it is important to stay aware of the lifetime allowance and any (potential) changes to it, which could impact your overall financial planning.

An example of a recent change, which could have significant impact on the pensions’ landscape, is that as of April 2015 it will cease to be a requirement for pensioners to use at least 75% of their pension pot to buy an annuity (a guaranteed income for life).

From April, pensioners (aged 55 or over) will be able to withdraw lump sums as they see fit, with the first 25% of any withdrawals being exempt from tax. This offers a huge degree of flexibility and could lead to pensioners having the scope to reduce their tax bill if they use their withdrawals strategically.

It also provides scope for pensioners to continue to use their pension funds as investment vehicles even after they reach formal retirement age. This option should be examined carefully before any decisions are taken.

While pension funds are built up through investments, meaning that the value of the fund does depend on the performance of the underlying investments, the traditional practice of using pension funds to buy an annuity meant that at that point, the risk of investments under-performing was transferred to the provider of the annuity.

Should pensioners wish to continue to invest their pension fund, they would have to accept the risk of investment losses themselves. Of course, they would also benefit from any gains.

Self-Invested Pensions Plans (SIPPs)

Traditionally, pension funds were something of a “black hole” investment in that individuals simply chose a pensions fund, paid their contributions and essentially left the rest to the fund manager. As their name suggests “Self-Invested Pension Plans” (SIPPs) are invested at the discretion of the pension saver.

There are some restrictions on how SIPPs can be invested, but it is fair to say that there is a very wide range of options available. As well as mainstream investments such as stocks and shares and unit trusts, SIPPs can invest in gilts, commercial property (not residential property) and in some cases in a business owned by the investor personally.

At this point, growth within the fund is free from income tax (in the UK) and CGT. Obviously tax laws can change at any time and therefore investors are well advised to keep abreast of relevant legislation.

On that note, those interested in SIPPs should be aware that the very nature of the vehicle means that the responsibility for choosing the right investments lies entirely with the investor. They are very much “hands-on” products and investors may find they need help from a financial advisor to make the right choices.

Investors should also remember that, like all investments, the value of a SIPP-based pensions fund can fall as well as rise.

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