Personal Pension Scheme (PPS), sometimes called a Personal Pension Plan (PPP), is a UK tax-privileged individual investment vehicle, generally designed to build a capital sum to provide retirement benefits, although it may also be used to provide death benefits.
The PPS can be crystallized, or vested from age 50, although this is to be changed to 55 on 6th April 2010. A PPS must be crystallized by age 75. On crystallization, a pension commencement lump sum (PCLS), also known as tax-free cash, of up to 25% of the fund can be taken. The remainder can be used to provide a taxable income either directly from the fund (this is called Unsecured Pension (USP), and has previously been called income drawdown or pension fund withdrawal), or by exchanging the fund for a secured pension income through the purchase of an annuity
Stakeholder Pension Schemes
A Stakeholder Pension is a type of Personal Pension Plan (PPP). In other words, it is a money purchase arrangement designed to provide a lump sum and income in retirement. Like a PPP, it is available to any United Kingdom resident under the age of 75 and be bought from insurance companies, high street banks, investment houses and some retailers. As with a PPP, a major feature of this type of pension provision is that you do not have to be in employment to take one out and you can provide a Stakeholder Pension for your spouse/partner or your children. In respect of the latter, the policy reverts to the child/children at the age of 18.
A Stakeholder Pension has been designed to incorporate a set of minimum standards laid down by the Government. These include:
- A charging structure that is capped: a maximum of 1.5% a year for the first 10 years and 1% a year thereafter
- Unlike many personal pensions, there can be no penalties on stopping contributions to an individual's fund or on transferring the benefits to another scheme
- The minimum contribution cannot be greater than £20 in any period whether regular or a one-off payment
- At retirement, the option exists to take a quarter of the fund as a tax-free amount
- Retirement age can be at anytime between the age of 50 and 75 (55 and 75 from 6 April 2010).
Occupational Pension Arrangements
Occupational pension schemes are pension arrangements that are set up by employers to provide income in retirement for their employees. Although the employer is responsible for sponsoring the scheme, it is actually run by a board of trustees - with the exception of most public sector schemes. It is this board of trustees that is responsible for ensuring payment of benefits.
There are two different types of occupational pension scheme - money purchase and final salary. The following is a simple explanation of how each of them works:
Final Salary
Final salary schemes are sometimes known as defined benefit or salary related schemes. Members contribute to the scheme with the promise of a certain level of pension. The amount of pension payable from such a scheme is dependent upon:
- the length of time served in the scheme (known as pensionable service);
- earnings prior to retirement (known as final pensionable salary); and
- the scheme's 'accrual rate'. The accrual rate is the proportion of salary that is received for each year of service. So, if the scheme has an accrual rate of 60, the member will receive 1/60ths of his final pensionable salary for each year of service completed.
For example: pensionable service x pensionable salary
60
Money Purchase
Money purchase schemes are sometimes referred to as defined contribution schemes. Employers and employees contribute to the scheme, where the money is invested, and build up, for each scheme member, a 'pot of money'. The amount of pension payable from this scheme is dependent upon:
- the amount of money paid into the scheme (by the member and the employer);
- how well the investment funds perform; and
- the 'annuity rate' at the date of retirement. An annuity rate is the factor used to convert the 'pot of money' into a pension.
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