Most people now recognise that it is sensible and wise to make detailed plans for their retirement. This is particularly true for those who may be hoping to retire before the usual State retirement age, which for most people is now 65. Indeed it is quite possible that many will be retired for as long as they are working.

Setting aside regular amounts of money during your working life is probably the best method of ensuring that you will have sufficient income during your retirement. Investing in pension plans has historically been the most popular method of making these regular commitments. The tax advantages offered by the UK Government provide the opportunity for pension funds to grow with virtually no tax and the ability to draw a significant amount of your pension fund as a tax free cash lump sum make this method even more attractive.

It is becoming increasingly important for people to use a variety of methods of saving money for their retirement, such as an Individual Savings Account, or ISA. However for most people a pension of some description is still the foundation upon which retirement funds are built. Whether you are employed, self-employed, taking time away from work to raise children or work as a carer or you are a director running your own company regular savings into pension plans must be seriously considered. This section hopefully gives you a brief guide in explaining the differences between the various types of pension arrangements.

Stakeholder Pensions

The introduction of stakeholder pensions in April 2001 brought with it a complete set of new rules for all “defined contribution” pensions, namely those that are not set up as occupational pensions. These are normally personal pensions and group personal pensions.

Almost any UK resident who is aged under 75 and is not a member of a “defined benefit” occupational pension scheme is able to contribute up to £2,808 a year into one of these plans. This is a net figure and is added to by the Government to the tune of £792, bringing the total contribution, gross, to £3,600 a year. In addition those with sufficient earnings are also able to contribute additional funds, bringing their total investment potentially up to 40% of earnings, according to age. Anybody who can demonstrate a higher earnings level within the last five years can use these higher earnings as the basis of calculating increased maximum contributions.

One of the major changes to pension schemes as a result of the stakeholder legislation was that those with no earnings at all, such as mothers looking after children and home carers, are now able to make contributions into pension schemes.

In addition the new rules also dictated that almost any company employing five or more people must provide access to a stakeholder pension scheme for their employees, or have some kind of suitable alternative in place. This does not however compel the employer to make contributions.

It is also now possible for members of “defined benefit” occupational pension schemes who are not controlling directors and whose earnings are less than £30,000 a year are now also able to contribute up to £3,600 a year gross into a stakeholder pension plan. This is in addition to what is going into the occupational scheme and is a major benefit to those people, earning reasonable amounts of money, to find a way of facilitating early retirement.

To qualify for the Governments aim of providing CAT standard products (charges, accessibility, terms) stakeholder plans must adhere to certain conditions. These conditions include limits to the annual charge; no more than 1% per annum and there must be no penalties for suspension of contributions and no charges for transfers in or out. This maximum 1% charge is designed to meet all operating costs and include a reasonable allowance for the cost providing information, though not necessarily advice.

There were a number of other significant changes as a result of the stakeholder legislation, including amendments to the facility enabling waiver of premium benefits to be added to new contracts as well as the ability to carry forward unused tax relief. In addition there have been regular changes to Government thoughts with regards to the minimum income people can expect from the State when they retire. All of this means that those who are seriously considering the amount of money they need when they retire should take advice in order to take all of the factors into consideration.