How does the Stakeholder pension work?

• What are the tax advantages of investing in a Pension?

  A pension plan can be one of the most tax-efficient ways to invest for an income in retirement. You receive tax favoured growth within the fund, plus tax relief on the contributions that you pay.

  Whether you pay tax or not, a total contribution of £100 to your pension will only cost you £80 currently. That's because the taxman will automatically add a further £20 in relief*.

  If you pay higher rate tax of 40%, you're entitled to relief at your highest marginal rate. So a total contribution of £100 could cost you £60. The extra £20 relief (based on currently the extra 20% tax you would pay as a higher rate taxpayer) won't be added to the value of your plan. Instead you should claim it from HM Revenue & Customs on your annual tax return.

  *Based on 20% basic rate tax for tax year 2008/09.

  This is based on our current understanding of current tax legislation and HM Revenue & Customs practice, both of which may change. The amount of tax relief actually given will depend on your individual circumstances.

  

• How much can I invest in my pension?

  Each tax year the maximum tax relievable contributions you can make (including tax relief received) is the greater of £3,600 or 100% of your relevant annual earnings.

  An Annual Allowance (£235,000 for the tax year 2008/2009) applies to all your pension arrangements and contributions in any tax year. It will be reduced by any employer/third party contributions made on your behalf (to this or any other scheme) and any increase in any benefits you may have under a final salary arrangement. All contributions that exceed the annual allowance are subject to a tax charge on the excess.

  There is also a Lifetime Allowance on the amount of the pension funds you can accumulate under all your pension arrangements, currently set at £1.65 million (for the tax year 2008/2009).

  Any funds greater than the Lifetime Allowance will be subject to a tax charge on the excess.

• When can I take my pension benefits?

  Until 5 April 2010, you'll be able to take your benefits at any time between ages 50 and 75. From 6 April 2010, the earliest age at which benefits can be taken (other than on ill health grounds) will increase to 55; the latest age will remain 75.

• What kind of pension benefits can I expect?

  Currently, up to 25% of your pension fund can be taken as a tax-free lump sum, the balance must be used to provide you with a lifetime income. There are many options but this is generally taken in the form of an annuity. This is a vehicle that provides you with your (taxable) pension income.

  You can also invest your lump sum to enhance the regular income that you receive from the rest of your pension fund.

• How does an annuity work?

  An annuity is a type of policy that pays you an income however long you live. So if you die only a few years after buying your annuity, you'll have paid more for it than you'll have received in income. But if you die many years after your annuity policy starts, you may receive far more in income payments than it cost you to buy. In effect the annuity covers the financial risk and expense of a longer life.

• How much does an annuity cost?

  The cost of an annuity and the level of income that you receive will depend on the size of your pension fund and how long the income is likely to be paid for. This reflects your age, gender, benefits selected and possibly your state of health or where you live.

  It is very important to ensure your pension fund will be sufficient to provide a worthwhile lifetime income. The table below shows the level of initial annual income that could be bought with a pension fund of £100,000. It provides a rough guide of the level of pension fund you will need to accumulate before you retire.

• How much could a fund of £100,000 provide?

  An initial annual income to a male non-smoker aged 60 for the remainder of his life increasing annually with the RPI		An initial annual income to a female non-smoker aged 60 for the remainder of her life increasing annually with the RPI
  Provider	Annual income	Provider	Annual income
  Axa	£3,576	Axa	£3,228
  Norwich Union	£3,816	Norwich Union	£3,234

  Source: FSA comparison tables, 13 March 2008.

  The figures provided are for illustration only; they are based on gross annual income which is payable monthly in arrears. Actual annuity income figures will vary according to an individual's age, gender, benefits selected and possibly their state of health.

• What are the risks and rewards associated with investing in a pension?

  A successful retirement plan isn't just about the contributions that you make. You'll also need to think about where your pension fund and contributions are invested. The key to investing your pension is to make the most of each contribution by selecting a basis for investment which offers the maximum potential for growth, at a level of risk which you feel entirely comfortable with. You need to bear in mind too:

  • that monies invested in your plan will be tied up until the benefits become payable and
  • the amount you invest is not guaranteed and you may get back less than you put in
  • the final plan value will depend on the amount invested, the charges taken, the plan term and the investment performance of the underlying fund(s)

  For full details of the pension products we offer and the risks and rewards of investment, please contact the Senior Financial Consultant at your local branch.