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What is a pension plan?

No one really imagines themselves working into their 80s. In later life you may want to stop full-time work, work part-time or stop work altogether and a pension plan could allow you to do this.

A pension plan is a long-term investment designed to help you achieve the level of savings and income you want in retirement. When you choose to retire you will be able to withdraw an income from your pension (in addition to any state pension) to cover your living costs, or provide you with financial support. That said, it is worth remembering that pension savings are by no means guaranteed; investments can go down in value as well as up.

A pension could be the most important investment you will ever make; it needs careful professional advice and should be reviewed regularly to make sure you are on track for your future.

How does a pension plan work?

Put simply, pension plans are a highly tax-efficient form of savings. In most pension plans, you will make regular contributions to your pension ‘fund’. These contributions attract tax relief from the UK Government at your highest rate of tax. This means a 20% or basic rate taxpayer will have pension contributions increased by 20% immediately. Higher rate (40%) taxpayers or additional rate (50%) taxpayers will immediately receive tax relief of 20% on their contribution and can claim the remaining 20% or 30% via their tax-return.

Your contributions can then be invested with the aim of increasing the value of your fund. Your financial adviser will work with you to establish the most appropriate range of investments for you and what regular contributions you can afford. Over the years, the value of your pension fund may go down as well as up, but you should focus on the long term. What matters is the value of the fund when you retire. You can keep track of how your pension is doing through a process known as pension forecasting.

When you reach retirement age you can normally take up to 25% of your pension fund as a tax-free sum. The remaining funds in your pension plan can then be used to provide you with an income. This can be done by buying a pension annuity, which pays out a guaranteed, taxable income each month for the rest of your life. Dependent on the plan, you can also buy annuities for your husband, wife or civil partner. Alternatively, you can enter income drawdown and draw an income from your pension whilst it is still invested.

The different types of pension plan

State Pension
The state pension, made up of the basic state pension and the state second pension gives you a regular income once you reach 65. It is based on National Insurance contributions and the amount you receive depends on how much you paid in.

Company or occupational pensions

There are two main types of pension scheme:

Final Salary Occupational Pension Schemes which are also known as Defined Benefit Schemes. These are schemes available through your employer into which you may be required to make a personal contribution. The benefits provided are usually based upon:
The number of years membership of the scheme
Your earnings, which typically may be averaged over the last three years before retirement, with a proportion of your earnings being paid as a pension for each year of scheme service. It is common for 1/60th or 1/80th to be given. Your employer is responsible for making sure that there is enough money in the scheme to pay for your benefits when you retire.

Money Purchase Schemes which are also known as Defined Contribution Schemes. These are schemes where a fund is built up for each member through the payment of contributions from you and/or your employer. The fund is usually invested in stocks and shares with the aim of increasing the size of the fund up to retirement. The fund is then used to provide benefits in retirement, some of which may be taken as a tax-free lump sum. The balance of the fund must be used to provide an income. There is no guarantee as to the level of benefits provided as this will depend on the size of the fund at that time. The value of investments is not guaranteed and these may go up or down.

From 2013, employers will have a legal responsibility to help you plan for your retirement. Companies will auto enrol all eligible workers into a pension and pay minimum contributions into the scheme. You can also contribute to increase your fund, or opt out if you want to.

Personal pension plans
Private pension plans provide retirement benefits based on the build up of your pension ‘fund’, accumulated through the investment of your contributions. These pensions are often used in addition to, or as an alternative to, company pension schemes.

Stakeholder Pensions
The Government launched these schemes in 2001 as the basic state pension is unlikely to provide enough income in retirement. They work in a similar way to personal pensions but must meet a number of minimum standards to make sure they offer value for money, flexibility and security. These pensions are often used as an alternative to personal pensions or company pension schemes.

Self-invested personal pensions (SIPP)
SIPPs work in the same way as personal pension plans, but give more flexibility in what you can invest in. Currently a SIPP can hold investments such as commercial property, land and stocks and shares. You can also have control over the investment strategy yourself, or appoint a fund manager to manage your investments.

Why choose Skandia for your pension plan?

Skandia offers a number of retirement planning solutions that can help you to look forward to your future with confidence, secure in the knowledge that you can afford to maintain your chosen lifestyle.

Skandia's available pension plans

Collective Retirement Account (CRA)
The Collective Retirement Account is a registered pension scheme available on the Skandia Investment Solutions platform. This allows you to make contributions personally or through your employer. It will also accept transfers from other registered pension schemes.

Money paid into the pension may be invested into Skandia’s wide range of unit-linked investment funds, from which you and your financial adviser can choose. When you reach retirement you can decide to take all your benefits at the same time or only take some of the benefits, allowing greater flexibility.

Skandia Personal Pension
The Skandia Personal Pension is a registered pension scheme from Skandia Life Assurance Company, offering access to around 450 unit-linked investment funds.

Self-Invested Personal Pension (SIPP)
The Skandia SIPP is a tax-efficient, registered personal pension scheme. It offers wider investment choice, as the investments are not restricted to investment funds. The scheme is administered by A.J. Bell Limited.

How do I apply for a Skandia pension plan?

To find out more about pensions from Skandia, please speak to a financial adviser who will be able to discuss your options and recommend products to suit your needs.

Need help planning for the future?

If you are concerned about your future financial security why not find out whether you are saving enough for your retirement by using our pension calculator.