Investing in Pensions

Pensions are designed to give you a regular income to live on when you retire, and are no longer earning an income from work. It’s an area that many people neglect to plan for, as retirement is often viewed as a distant event. But pensions provide us with an extremely tax efficient investment vehicle. And with some careful planning, some small financial sacrifices today can benefit you greatly in the future.

In recent years the average life expectancy has increased. This means more people are living beyond the retirement age, and there is an increasing strain on the state pension system. In response to this growing problem, the Government has been encouraging people to make more provision for their own pensions, through either personal pension schemes or employer’s schemes.

Personal pension schemes

You can contribute to personal pension schemes throughout your working life. Tax relief is provided on all the contributions you make up to certain limits, making personal pensions a very tax efficient form of investment. The savings into these schemes are locked up until retirement age, and the benefits from stakeholder and personal pension schemes may only be paid as a pension, starting from any age between 50 and 75 (in 2010, the minimum relevant age will rise to 55, except for some specialist occupations). Your pension income comes from converting your fund into an annuity (annual income from investment), which you then receive for rest of your life.

Employers' schemes

Most employers offer some sort of pension scheme. These are generally offered in 2 main formats - ‘final salary’ or ‘money purchase’ schemes. Final salary schemes offer a pension directly related to your salary level when you retire (and length of service). Money purchase schemes provide benefits from a fund which has been built up during your working life.

In the majority of cases, employers’ schemes are contributory – in other words, the employer and the employee both pay into the scheme. Many employers pay significantly more into their schemes compared to employees, and the scheme will usually provide you with a tax-free lump sum on retirement.

To find out all the facts as they affect you, call into your local Bradford & Bingley branch, and speak to one of Legal & Generals Financial Advisors.