Example
We have detailed below a fictitious client that we have advised regarding his S2P pension planning.
- Mr Stirling Aged 30, (Married to Mrs Stirling aged 27)
- Earnings £22,000
- Wishes to retire at Age 65
- State retirement age 68
- No Employer pension available.
For full details and example please click here
Click through the steps below to reveal more detailed information.
-
Step One
- Mr Stirling Aged 30 earnings £22000
- S2P Estimated replacement payments
- In 2008/09 £1338.90
- In 2009/10 £1360.79
- In 2010/11 £1382.68
- Please click here for an example illustration
- These funds are then invested within a personal pension of Mr Stirling's choice (don't worry - we can help you choose too)
- If the fund were to grow at 7% every year, after charges the fund value at Mr Stirling's 65 birthday could be £21,600
- Which means that Mr Stirling could have a tax free lump sum £5,400.00
- Whilst Mr Stirling was looking for a lump sum when he retires, it is very important to remember that a pension should be there for an income.
- S2P benefit if contracted in for Mr Stirling could be worth £267.50 per annum and £133.90 per annum after his death for his wife.
-
Step Two
- Mr Stirling can re-direct some of his national insurance contributions into a pension of his choice instead of receiving the payments from the state after his retirement
- He would have choices as to how the money is invested
- He would have a number of options when and how to draw his pension
- He can take 25% of the fund value as a cash LUMP when he retires
- We have advised Mr Stirling to "contract-out" having considered all available providers we considered the Scottish life scheme to be the most appropriate, other schemes are available and advised upon.
- Scottish Life was chosen for the purposed of this illustration given the factors specified by Mr Stirling.
- View Mr Stirling's illustration
-
Step Three
- The S2P payments that have been invested in the scheme we have looked at previously:-
- If the Investment Growth Achieved is 1% above inflation, currently 3.8% (source ONS) therefore 4.8%
- And if the Interest rates are at 2.1% when Mr Stirling retires then he receives...
- Income £162 per annum
- If the Investment Growth Achieved is 3% above inflation currently 3.8% (source ONS) therefore 6.8%
- And if the Interest rates are at 4.1% when Mr Stirling retires then he receives...
- Income £473 per annum
Therefore if your pension fund were to grow (after fees and charges) approximately 2% above inflation currently 3.8% (CPI) your pension fund without taking your tax free lump sum your pension should be worth more than it would be if you had left it within the state scheme!
Also Mr Stirling would have had the option of a lump sum and taking his personal pension benefit earlier than than he would have done within the state scheme.
-
Step Four
- In "contracting out" of S2P the state second tier pension Mr Stirling could receive more or less than he would have done in the state scheme.
- If he contracts out the ultimate value of his pension will depend on investment performance which is not guaranteed the value of his funds may fall as well as rise. Past performance is no guarantee of future returns. Personal Pensions are subject to charges.
- It is not known for how many years S2P payments will be made from the State schemes into personal pension arrangements, and it is possible that they may come to an end around 2012.
- If you are a member of your employer's company pension scheme, especially if you company scheme is a defined benefit scheme. Your contracted out payments already to be being paid into this scheme already, it therefore, would not appropriate to contract out into a different scheme.
- If you remain contracted in to the state scheme, you will only receive the state pension payments from your state pension age which is increasing. Please check the calculator available to you.
- If you contract-out you will be able to draw your S2P benefits from your 55th birthday onwards. In drawing your pension benefits early the overall level of benefits is likely to less than if you retire later.
- Inflation will reduce the value of your fund in the future. State, Tax and Pension rules are subject to change.
- Your S2P benefits will be used to provide your spouse or civil partner with a pension after your death in retirement whether contracted in or out.
- Income payments from a personal pension or from the state scheme are subject to income tax
