Thomas Dickson is a partner in Essential Money and a members of the The Association of Specialist Providers to Dentists (ASPD).
Following the recent significant changes within the pension industry, and with reform of the NHS Pension Scheme under debate, it seems an appropriate time to review the situation.
The proposed changes are likely to come into effect no later than April 2008 for existing members and by the end of 2007 for new entrants. Two key changes will be that new members joining the NHS after 2007 will have a retirement age of 65, and the 6% contribution rate now being paid by existing NHS pension scheme members is likely to increase and will be related to earnings.
A further change will restrict membersâ€™ purchase of additional annual pension to only Â£5,000 per year, and although existing added yearsâ€™ contracts will be honoured no new contracts will be offered. This year is likely to be the last opportunity to take advantage of this benefit, and as itâ€™s only possible to start these contracts on a birthday, and illustrations are currently taking up to 3 months to be completed, Iâ€™d recommend taking action immediately!
The proposals are still at the draft stage, but you can find out how they will affect you by downloading the information from www.nhsemployers.org.
The basics of Personal Pensions
If you donâ€™t think your NHS pension will be enough to provide you with an adequate retirement income youâ€™ll need to make further provision, and one of the most tax efficient options is a personal pension. A personal pension plan offers up to 40% tax relief on your contributions, tax free growth during its term and on retirement you can take 25% of the fund as a tax free lump sum, with the balance providing additional taxable income.
In a typical example, if a basic rate tax payer pays Â£78 into a private pension the provider will gather a further Â£22 (22%) from HM Revenue & Customs (HMRC), and if youâ€™re a higher rate tax payer you can claim a further Â£18 (18%) on your self assessment. In effect, it costs Â£60 to pay Â£100 into a personal pension, with the balance being paid by HMRC; not a bad offer in these hard times!
You can now invest up to 100% of your earnings in a personal pension every year up to an overall annual limit, which is Â£225,000 in 2007/08. Even if you have no earnings, you will still be able to invest up to Â£3,600 per tax year before tax relief.
Everyone now has a maximum permitted tax-exempt fund (or its equivalent in retirement benefits). This is called the lifetime allowance (LTA). In 2007/08 itâ€™s Â£1.6 million, rising to Â£1.8m in 2010/2011. If you have NHS pension benefits your equivalent fund is the annual pension multiplied by 20, plus the lump sum, plus the total fund value of any personal pension(s) you may have.
There are penalties for exceeding the lifetime or annual allowances, so if you already have significant pension benefits you should make sure youâ€™re not overpaying pension contributions.
When you can retire
The earliest age at which most people will be able to take money from their pensions will rise from 50 to 55 on 6 April 2010.
If youâ€™ve been advised to incorporate be sure that any pension contributions are paid by the company rather than from your personal bank account. When the contribution is paid directly by the company, there are savings on National Insurance for both employer and employee.
What you should know about a personal pension
There a number of issues which will influence your choice of a personal pension provider –
- The higher the administration fees on your pension fund the less money will be available for your retirement. In the last few years pension charges have reduced dramatically, but we are still meeting people with â€˜old styleâ€™ pension schemes which incur high annual charges. Typical pension fees now are less than 1% of the fund value per year, so if youâ€™re paying more than that, transfer your pension now.
Itâ€™s relatively simple to transfer to a low cost alternative, but you will need to factor in any possible transfer fees.
- Investment Funds
- One of the most important aspects of personal pensions is how the funds are invested. There is no ideal investment portfolio, as individual circumstances and attitude to risk are infinitely variable. Younger investors are generally prepared to take greater risks whilst those nearing retirement tend to reduce their exposure to equities and select more secure investments.
Figures based on UK All Companies pension funds show that if youâ€™d picked the best performer a year ago Â£1,000 would have grown to Â£1,265, but if youâ€™d selected the worst your investment would have shrunk to only Â£939.00. There are never any guarantees, of course, but with a 34.7% difference in performance between funds operating in the same sector it makes sense to hedge your bets by spreading your investment. Had you decided to diversify your investments even further and chosen a commercial property fund, the best fund would have increased your Â£1,000 investment to Â£2,327 over the same period.
- Flexibility & Transfer values
- As nobody knows what the future holds we normally recommend pensions that provide flexibility in terms of paying contributions and transferring the benefits to other schemes. Because everyoneâ€™s circumstances are different, you should always seek specialist advice.
- Financial strength of the provider
- In recent years the failure of several high profile financial service companies has made headlines, and you must have complete confidence in your choice of pension provider. There are various agencies which measure institutionsâ€™ financial strength and provide ratings which you can use to make comparisons â€“ you want to be sure the company will still be around when itâ€™s time to draw your pension and start enjoying the fruits of your investments!
For further information on the ASPD, its members and services, call 0800 458 6773.