News

Stop Press :Simplistic Pensions Overview.

In trying to make a topic simple but informative, some detail is necessarily lost.  And remember, in law, there is the general rule, and then there are always exceptions to it!

Pensions can come from three sources:-

1)  State (OAP and employees of the state e.g. police, judges!),

2)  Employers, and

3) Individuals.

The types of schemes can be generally divided into the following:-

1)  Defined contribution

2)  Defined benefit, 

3)  Sometimes a hybrid of the two.

Defined contribution schemes: 

Money is paid regularly into a policy and units are bought in an investment fund, providing a monetary value available at retirement.  25% can be usually taken as a tax free lump sum; historically an annuity was bought with the balance, but that is now less popular.  The funds can now be held in drawdown and taken subject to paying tax on anything taken above the 25% tax free limit.

Defined benefit: 

The terminal benefit will be an actual amount or, more often determined according to a formula, e.g. a proportion of salary dependant on number of years worked, more latterly though, career average earnings are used, not final salary. 

Such schemes are either

1)  State e.g. nhs, teachers, armed forces, or

2 ) Provided by employers. 

State pensions are unfunded i.e. no fund set aside to pay pensions but paid out of future taxes and members contributions.  On pension share the non spouse cannot transfer out of the scheme. 

Employers pensions are either funded or unfunded.  Money can be transferred out by a non member under a sharing order, because funds are there to support the withdrawal.

A few words about personal pension schemes:

The simplest form of personal pension scheme is where regular contributions are made to   a pension scheme and units are bought in a managed fund. 

Self administered pension schemes can present difficulties in pension sharing especially where the member invests in property, which can cause valuation problems, and funds are not liquid.  If there is a transfer within the scheme then legislation provides for each member has to be a trustee, which a transferring spouse may resist as it maintains a nexus between divorcing spouses.  A loan of up to 50% of the property value can be obtained against the property to free funds.  But if the property is part of an income producing business, it may not be an easy or desirable route.

Stakeholder pensions are a form of defined contribution personal pension. They have low and flexible minimum contributions, and capped charges. Some employers offer them or you can start one yourself without being employed (there are restrictions, contributions are limited).  Guaranteed Annuity Options schemes and Retirement Annuity Contracts schemes, are not offered  these days but you may come across one started years ago.