Time to think personal
YOUR MONEY The third in a series on pensions made easy looks at the pros and cons of private plans
Sunday 12 November 1995
There is no doubt that employers' pension schemes tend to be better, with better benefits for lower contributions. But many people do not have that choice.
The big advantage of saving for retirement using a pension arrangement, whether an employer's scheme or a personal plan, is tax efficiency, though benefits from personal plans are unpredictable. They depend on how much you pay in, how well the money is invested and how much is deducted in charges. Even if you can guess the likely final value of your personal pension pot, there is another uncertainty: annuity rates at the time you retire. Annuity rates change over time. Your pension income will depend on what annuity income your accumulated fund can buy.
Millions of employees have a personal plan because they have opted out of the Serps part of the state pension scheme. The government pays a contribution directly into the plan. It is possible to have this sort of plan and belong to an employer's scheme, so long as the scheme is not one contracted out of Serps.
But disappointment is almost certainly in store for employees who have only a Serps replacement plan, and who neither belong to a company scheme nor pay any money into a personal pension plan. The redirected Serps National Insurance contributions, even with any bonuses offered for contracting out, are unlikely to produce a sufficient retirement income.
While undoubtedly personal plans are the best option for some, others should be wary of the claimed advantages. First, the contribution limits on which you can get tax breaks are limited to 15 per cent of pay, if you belong to a company scheme. But for personal pensions, they start at 17.5 per cent of pay and rise in various stages to 40 per cent by the time you reach 61 (on up to pounds 78,600 of pay).
This is an advantage over employer schemes only for people who are perhaps late in making provision and/or who want to make substantial contributions over a relatively short time. In practice, few people can afford to make use of the maximum contribution limits. Secondly, that personal pensions are "portable". No matter how many job changes you have, you can carry on paying into the same pension plan. In practice, although a single personal pension plan may be administratively easier, it is not always the best option.
Even short to medium-term membership of an employer's scheme may offer better retirement benefits. The collection of smallish pensions from different employers may turn out to be only a minor administrative inconvenience. It will be bearable if the total of several small pensions is greater than you would have achieved from paying only into a personal pension plan.
Perhaps the greatest allure of the personal plan over the employer's scheme is that you can retire at 50 rather than wait until 60 or 65 with an employer's scheme. But at the age of 50, your accumulated pension pot will be lower than if you wait another 10 or 15 years.
q Next week, what to look for in a personal plan.
- 1 Woman falls to her death as she celebrates marriage proposal at the edge of Ibiza cliff
- 2 Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
- 3 Dad attempts revenge on teenage daughter, plan backfires spectacularly
- 4 Ball pool for adults opens in London
- 5 Amal Clooney gives excellent response to fashion question at European Court of Human Rights
Isis 'throw man off a building for homosexual affair' and beat him to death when he survives
Woman falls to her death as she celebrates marriage proposal at the edge of Ibiza cliff
Boris Johnson claims porn-obsessed Islamic jihadists are 'literally w*****s'
Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
Ball pool for adults opens in London
9 reasons Greece's experiment with the radical left is doomed to failure
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
Have we reached 'peak food'? Shortages loom as global production rates slow
Greece elections: Syriza and EU on collision course after election win for left-wing party
British grandmother Lindsay Sandiford faces execution by firing squad in Indonesia
Liberal Democrat minister defends comments suggesting immigration causes pub closures
iJobs Money & Business
£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...
£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...
£13000 per annum: Recruitment Genius: This Pension Specialist was established ...
£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...