Whilst the principle of a pension annuity is seemingly very straight forward, however, things are rarely quite as simple as they seem.

The first and probably most critical aspect of buying a pension annuity is that it is a long-term, one-off commitment. You have just one shot at it, since there is no going back and asking for a refund of all of the capital simply because, after the event, you have found a better deal elsewhere. In other words, it is very important that you make the right choice.

Making the right choice is made no easier by the fact that a host of different annuities all offer a host of different annuity rates – i.e. will offer a different level of income for the same amount of pension investment.

The difficulty is further compounded by the sheer number of different types of annuity available these days.

Standard annuity – the most conventional form of annuity is one that pays you a fixed income throughout the remainder of your life. The income is known in advance, so you have the security and peace of mind in knowing just how much that will be;

With profits annuity – as the name suggests, this relates the income you receive to an element of your initially invested sum that is in turn invested again in equities, bonds and gilts. In this way, your annuity reflects some of the risks inherent in such investments;

Unit-linked annuity – this is probably the choice for those prepared to take the greatest risk on an annuity that is entirely subject to the fluctuations of the investments made;

Immediate (“temporary” or “purchased life”) annuity – this form of annuity needs to be purchased either from the cash element of your matured pension fund or some other cash resource. The advantage of this kind of annuity is that part of the annuity is treated as a return of your initial capital and, therefore, is not taxed, whereas the whole of your pension annuity would be subject to income tax;

Impaired life annuity – this is a type of annuity designed for those whose actuarial life expectancy is lower than someone of the same age in the general population. Different annuities will operate different definitions of what amounts to “impairment” of life, but it is generally a question of an existing serious illness or lifestyle factors such as smoking, obesity or past occupation.

Summary

The seemingly simple and straight forward question of converting the final value of a pension fund into a regular, income-paying annuity actually requires the kind of advice you can best receive from an independent financial adviser, since:

? Your pension annuity decision is of a one-off type that you need to get right the first time;

? There is considerable variation in the level of income paid by any one annuity – naturally, you would want the highest paying;

? There is a wide range of different types of annuity – some higher, some lower, risk – an independent financial adviser will be able to help you choose the one you want.

Even though you may only be working part-time it is important that you consider your pension and seek professional advice as and when you may require it. In and amongst this consideration about your pension you need to bear in mind that even though you are only working part-time you are still entitled to the same pension rights as a full-time worker.

Traditionally workers simply did not have rights, let alone pension rights. However, as time has gone by the social attitudes have brought about a change in legislation as regards workers’ rights. It has taken a while for these worker’s rights to be passed over to those working part-time as well as the full timers but the law is certainly now more behind the rights of all workers than ever before. In the past, many part-timers missed out on the company pension scheme or they would not receive the employer’s part of the contribution to their pension.

The most significant change to part-time workers and their pension rights occurred in the UK in 2001 when the House of Lords ruled that part-time workers who could justifiably claim they had been discriminated against could make claims for pension rights dating back to 1976. These regulations were put in place to ensure that part-timers have exactly the same working rights and conditions as full-time workers. It is thought that the legislation has affected part-time workers within the education and health sectors the most. As many part-time workers are women (as the primary carer of their family unit) these regulations might also correspond to the sexual discrimination regulations and you should mention this to any professional you seek advice from.

This means that if you do not have access to the company pension and your colleagues working full-time do, then you could be entitled to a considerable pay-out from your company. In order to make the claim for the lost pension pay you have to have been working for the company for at least six months. If you are a part-time worker and you believe that this pension discrimination may apply to you, then you would be well-advised to seek professional advice from a financial adviser.

Here are five questions to help you work out if your finances are in good shape or battered by the credit crunch.

Do you have a pension?

If your answer is yes, move on to Question 2. If no, the seriousness of your position depends on your age and whether you have any other savings that you could use in retirement. Readers under the age of 40 still have plenty of time to build up a reasonable pension fund. But if you are older, you need to start setting substantial amounts aside now.

What type of pension plan do you have?

Employees who have the option of joining a company pension scheme to which the employer makes contributions should grasp the opportunity with both hands. For those who don’t, a cheap stakeholder plan from Friends Provident or Clerical Medical is a good starter plan. If you want to make big contributions and have tight control over the investment of your money, you could consider a self-invested personal pension (Sipp) such as the one sold by Standard Life.

When did you last check the performance of your pension?

You need to keep an eye on where your money is invested and how it is performing to make up any shortfalls as and when they develop.

What are its charges?

Since April 2001, charges on some personal pension plans have been lowered but other plans still suffer from high charges that will eat away at the value of retirement benefits.

How much do you contribute?

Most people like to think they will retire on an income equivalent to two-thirds of their final salary, but few end up with that. Check how much you need to save according to your age, salary and expected retirement age at pensioncalculator.org.uk.

Coming to the points as to why the average investor should consider this investment as a part of their investment portfolio. The main feature of a good pension plan is to be deterrent for early withdrawals. Templeton Indian Pension Plan (TIPP), generally allows you to withdraw your money after 58 years of age or after 3 years of investment. If you do want to withdraw your money after 3 years of investment, even if you aren’t 58 years old you can do so after paying a 3% exit load (administrative charges you pay when you sell your units or assets). The power of equities will provide you long term capital gains if your investment portfolio has a time period of a minimum of 10 years. Templeton Pension Plan offers better tax-saving options when compared to other investing instruments of the same genre. Returns from NSC or PPF will be hard to match the returns generated by TPP if one is willing to consider a comparison given that PPF and TPP are retirement-oriented investments.

Whenever you opt to invest in a Mutual Fund, two prime factors that needs to given due importance are Asset Allocation and Fund Manager. TIPP has increased its exposure to IT stocks in the latest quarter and reduced exposure to stocks in the metals space such as Hindalco. A well-diversified equity portfolio with limited exposure to mid-caps makes it a less risky portfolio. As far as performance goes the plan has delivered an impressive cumulative annual return of 18 per cent for the last five years. The fund has been able to beat its benchmark returns and has also recorded lower losses than its benchmark in the last quarter, when the market turned weak.  So for investors who are looking for a good investment module to invest in other than the regular insurance product TIPP is an excellent option.

To reduce the liability, one by one, companies closed their final salary schemes to new members. The rules of some existing schemes were also amended to require higher contributions to be made.

This means that the number of employees retiring with a pension that pays around 50% of their final salary is forever reducing, and is a trend that will not be reversed. Granted, the number of people staying with the same firm to amass forty years of service to qualify for the maximum pension is also reducing. Greater movement in the labour market will also be a contributing factor in lower pensions at retirement.

So where does this leave employees? Companies that have moved away from final salary pension schemes have turned to offering defined contribution or money purchase pension schemes. Here the employer and employee pays contributions into the scheme, more than likely based on a percentage of current salary. The premiums are then invested in pension funds that can range from with profits to UK equities to Far East funds. At retirement the amount in the kitty depends on the level of contributions but also on how well the funds have performed, increasing the risk to the employee.

The big difference is the level of contributions paid into the respective schemes by the employer. A typical final salary scheme may have received 15% – 20% from the employer with employees paying 5% or 6%. The money purchase scheme will require the employee to contribute at a similar level but the employers premium may have reduced to 5% also, that is to match the employees contribution.

It gets worse still for the employees whose company now offers a stakeholder pension scheme, whereby the employer contribution may be in the range of 0% to 3%.

It’s not difficult to see the impact this has on the pension pot. With contributions to money purchase schemes at least 50% lower than final salary schemes the amount of income it generates will drop by a similar amount. This could be less than the amount required to live on.

So from having 100% of salary many people face the prospect of receiving one quarter of that amount. Where does this leave employees in this situation? Well, neither option is easy to swallow. First, you work longer, putting back your early retirement at 55 to a more realistic 65. Another ten years at work definitely doesn’t appeal. The second option is to save more. Not always doable with rising living costs such as mortgages, utility costs and petrol, but saving as much as possible will help. For those lucky enough to be just starting out at work, the best option is to start a pension (or savings plan) as soon as you can.

What You Need to Know About Traditional Pension Plans

In essence, this type of plan provides a guaranteed annual return once you hit retirement age. The annual payment is based on your years of service and last average salary. The company contributes most of the money. And unlike the 401(k) plan, the money you accumulate won’t be diminished because of the fluctuating stock market.

Corporate employers are required to maintain the traditional pension plans funded even if the stock market is crashing. Congressed passed the Pension Protection Act in 2006 which dictates the amount of cash a company must put into the pension plan every year. As long as you’ve been covered for at least five years by the same company, you are entitled to the payment upon retirement even if the company discontinues the plan. The only catch is that you need to wait until you hit 55 because this is the eligible retirement age.

Why Do Employers Want to “Freeze” Pension Plans

Legally, corporate employers can freeze their plans. In today’s economic climate, there are a lot of reasons why they are tempted. For instance, the traditional pension plans are viewed as a risk because if the pension plan’s assets don’t make enough money to cover the entire retirement benefits, the corporation will make up for the discrepancy.

This means that instead of using cash for debt repayments, dividends, and new investments, the corporate employer is required to divert their cash flow to pay for retirement benefits. In addition, because majority of pension funds asset are tied up with stocks, there is a high probability that companies need to pay more when the stock market deteriorates.

These developments have enticed an increasing number of companies, including those in the Fortune 500, to put their employees on 401(k) plans. The biggest problem with freezing is that the benefits will be locked in their current level forever. If your company froze the plan when your pension was $2,000, you will receive that same amount upon retirement age even if you stay with the company for 25 more years.

For those that are dependant almost entirely on monies they receive from their UK pensions, these are worrying statistics. While there are systems in place which can offset this problem to a degree by offering a fixed exchange rate on monthly transfers, for those planning to stay away permanently there is a much better option. A QROPS, or Qualifying Recognised Overseas Pension Scheme, provides a way to move the whole of a UK pension abroad into a foreign pension scheme. In this way payments can be received in the local currency thereby avoiding negative currency fluctuations and conversion charges. 

This is not the only way in which QROPS pensions can help expats though. Compared to the UK, where a tax free lump sum of 25 percent can be taken from a pension scheme, under QROPS this is increased to 30 percent. There is no obligation to buy an annuity at the age of 75, a much wider range of investment opportunities on offer which allows for greater flexibility and personal control, plus a QROPS transfer can be moved to a low tax jurisdiction, which means little or no income tax are levied on these pension benefits. Add to this the fact that there is zero percent inheritance tax, where residual funds left after death can be passed onto chosen beneficiaries, and the QROPS benefits become overwhelmingly apparent. 

To be eligible to receive QROPS, a foreign pension scheme must be registered with HM Customs & Excise and included on their QROPS list. As these overseas pensions are still subject to UK law as well as those of the hosting country, it is appropriate to find an independent financial adviser conversant in both legal systems and who is board certified by the Financial Services Association. For expats to fully benefit from QROPS they must have lived 5 complete tax years outside of the UK, although the procedure can be instigated long before this.  

Whether a pension transfer is something you should be considering, of course, will depend on the performance of your current pension fund. Together with your home, this is likely to be one of your larger investments and, as with any investment, you will want to make sure that your hard-earned money there is working as hard for you as it possibly can. With the value of your home, for example, you probably follow every twist and turn of local property prices and keep a fairly close watch on just how much it is worth. How many people do the same with their pension investments?

With your pension fund, it is not just the overall value and performance you will be interested in. Have you recently reviewed what management or administration fees you are paying? Could you get a better deal for less?

Ready to transfer?

If you believe it is time for a change, there are one or two things you should definitely do first before committing yourself to a transfer:

- Above all, do not consider transferring your pension without seeking the expert advice of a registered independent financial adviser;

- If you have not done so already, one of the first things your adviser will ask to see is a transfer value analysis. As the title suggests, this is an analysis which allows you to compare the value and performance of your current pension investments with the alternatives. It should include a figure called the “critical yield” (typically somewhere between 7% and 11%) which tells you how fast any replacement scheme would need to grow to match the performance of your present scheme. A good rule of thumb will be a figure of 8%. If your present scheme is returning anything less than this, then you might want to take the idea of a pension transfer further;

- What are your intentions regarding retirement? When do you hope to start drawing on your pension? If you are planning to retire early, for example, you will need to ensure that any replacement scheme to which you are intending to transfer is sufficiently flexible to allow this;

- With the help of your independent financial adviser, you will naturally want to check again the current financial position and performance of your present scheme. In the event that it is showing a surplus, with a higher value on assets than liabilities, then it could well prove worthwhile staying with your present pension fund.

Summary

It is certainly worth reviewing and monitoring your pension fund in the same way that you would any other investment, to consider the potential benefits of a pension transfer:

- Financial performance, management costs and flexibility might be a useful basis for comparison;

- Before doing anything, however, make sure that you seek the services of a reputable, independent financial adviser;

- Get a transfer value analysis of your current pension scheme;

- Take into account your actual retirement plans and any intention you might have to retire early.

This decision is based on a number of reasons, the most prevalent reason behind the climate being the quality of life that ones life savings can deliver in other economies. Of course for many seeking this sort of retirement meant giving up their pension schemes, however after legislative changes in April 2006 the Qualifying Recognised Overseas Pension Scheme or QROPS, was established.

Previously if a pension scheme holder was to leave the country of residence that the pension scheme was made in then they would be unable to claim it. This all changed when it was announced in 2006 that the QROPS pension release scheme was established which means that with the permission of the tax authority, if your pension scheme qualifies it can be released to you in the country you have repatriated to.

HM Customs and Excise has a list of qualifying pension schemes for the UK, however it is available in many other countries. If you are a US resident then it is doubtful that you will be able to participate in QROPS but many other countries can apply. The benefits can be significant however it depends on the individual in questions circumstances and more importantly the country they have repatriated to.

The process begins with application for QROPS and it is recommended to seek expert financial advice regarding the process. This is optimise your chances of a successful application; so whether you are currently residing in another country, in the process of moving or just considering emigrating then you can contact many QROPS experts and arrange free consultations.

The considerable benefits of the QROPS scheme is felt in countries where you do not have to pay tax on payments such as pensions. There is a period of 5 years which is referred to as the reporting period, when the QROPS provider has to report all financial activity to the residents tax office. After this period has elapsed then you are free to do what you wish with the QROPS money.

There will be specific restrictions with each country however in many cases money can be obtained tax free, or financial experts can advise on relocating your QROPS to a third country. This is useful if the country of residence has in place similar tax framework and restrictions as the UK when it comes to accessing benefits.

Another key QROPS benefit is that there is no need to purchase an annuity. This means that the pension holder does not have to purchase an agreement with your pension provider to pay monthly instalments from your pension savings, unlike in the UK where severe penalties can be incurred. If an annuity in not put in place by 75 in the UK, the tax office can levy a charge of 82 percent of the pension fund.

This enables an individual to withdraw or transfer a lump sum to re-invest in other, potentially more lucrative investments plans. This also means that upon the death of the policy holder, their pension fund can be left in a will to other parties, as opposed to the UK when upon death many pension schemes terminate. It is advisable to seek expert financial advice on QROPS before making an application.

2. Define benefit plan
Most plans require at least for a 5% contribution by employer and employee. The pension provides for a formula as below
percentage of contribution x monthly income requirement x years of service = monthly retirement benefit.
If the employer’s contribution is not sufficient, the employer must make additional lump sum payments to create the necessary funds.
The defined benefit plan has two known factors and one unknown factor
a) Known factors
* Employee contribution
* The pension is known well before retirement.
b) Unknown factor
How much for the employer to fund such pension, because the return of investments are not guaranteed.
The formula used may provide for several variations, based on the amount of the pension
* Best five years of earnings.
* Best five years of earnings in the last ten years.
* Final average.
Pension parallels final year’s income
* Career average.
Employer contribution to employee registered pension plan depends on seniority of each employee resulting in less contributing for younger employees.
* Flat benefit plan.
negotiated by union on behalf of employee as a union member with employer.

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