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Last Updated: Monday, 23 June, 2003, 11:39 GMT 12:39 UK
A beginner's guide to pensions
Chelsea pensioners

The thought of starting a pension probably either fills you with dread or sends you to sleep.

Whichever it is, you can't afford to ignore this most important of investments.

And the sooner you get around to stashing some money away for your dotage the better off you'll be.

Here we look at some of the most commonly asked questions to give you a basic guide to the UK pensions scene.

Why do I have to invest in a pension?

You don't have to take out a pension. But if you want to have a comfortable retirement, you'll need to start saving some of your own money. The days of generous state pensions are gone and not likely to return.

You could plan for retirement by investing in property, the stock market or antiques, if you want. But people tend to opt for pensions because they are designed to deliver a good balance of risk and return on your investments.

And, more importantly, the government effectively tops up your pension fund by providing tax relief.

Why can't I rely on the state pension?

The state pension is a safety net, not a retirement plan.

It's there to keep those unable or unwilling to save from starving in their old age.

But it's not generous enough to make you financially comfortable.

For the financial year 2004/2005, the full basic pension will be 77.45 a week for a single pensioner and 123.80 for a couple.

Women can retire and claim the state pension from the age of 60. Men have to wait until 65.

What is the Additional State Pension?

On top of your basic state pension you could be entitled to an additional pension, depending on your circumstances and whether you have paid the appropriate contributions.

It used to be called Serps, or the State Earnings Related Pension Scheme.

As the name suggests the amount you eventually received depended on how much you earned during your working life.

In April 2002 SERPS was replaced by the State Second Pension, designed to provide more generous benefits for low and moderate earners.

Anyone earning up to 24,600 should do better, but SERPS benefits from previous years are protected.

When you become a member of a company, stakeholder or personal pension scheme, you may be offered the chance to opt out of the State Second Pension.

As a result, you will either pay lower National Insurance contributions, or receive an annual rebate which is paid into your private pension plan.

It is a decision which shouldn't be taken lightly, because many financial advisers and pension companies are advising customer to carry on with the State Second Pension regardless.

The state pension is a safety net, not a retirement plan.

What is a personal pension?

A personal pension is any pension scheme taken out on an individual basis.

There are many different personal pension providers, from supermarkets to insurers and High Street banks.

The cost of these pensions has fallen in recent years thanks to increased competition and government action.

Investment performance and charges for personal pensions vary. It will pay to shop around, and perhaps get advice, so you get the best deal.

What is an occupational pension?

Occupational pensions, or workplace pensions, are the collective terms for a pension scheme provided by an employer.

Historically, your employer did not have to offer you an occupational pension, and if they did then they had to contribute to it on your behalf.

Much of that changed with the advent of stakeholder pensions.

Now all employers with more than five workers have to offer a workplace pension, but, they do not have to contribute to it.

What is a stakeholder pension?

Stakeholder pension is the government's big plan to make pensions affordable for everyone.

The pensions are designed to be straightforward, flexible and cheap.

If you work in a company with more than five employees, and do not already have access to an occupational pension, then you should be offered a stakeholder by your employer.

You don't have to accept the stakeholder pension offered by your company. You don't have to have a pension at all.

Also you can take out your own stakeholder pension if you are self-employed or don't like your employer's choice.

Charges on stakeholder pensions are limited to no more than 1% of the total value of the fund each year. There is no charge for switching providers.

For more on stakeholder pensions take a look at our stakeholder guide.

What is the Pension Credit?

This is a new entitlement for pensioners on low incomes, with a special top-up for people who have saved for their retirement.

It starts in October 2003.

The Pension Credit will include what was previously called the Minimum Income Guarantee (MIG).

Everyone over the age of 60 is guaranteed an income of at least 102.10 a week, or 155.80 for couples.

The big reform is the introduction of a reward for those who have bothered to save for their retirement.

As long as the income from those savings doesn't take a pensioner's earnings above 139.10 a week in total, the state will provide as much as 14 extra.

However, the reward element only kicks in for the over-65s.

What's an annuity?

This is the investment that you have to buy with at least part of your pension fund. You buy an annuity from an insurance company and in return you get an income for life.

The income is worked out according to the size of your pension fund, your age and life expectancy.

For more information on annuities, click the box below and go to our special annuity guide.


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