Pensions in the United Kingdom

UK Pension Provision falls into three major divisions:

State Pensions
Occupational Pensions
Individual Pensions

State Pensions

The state provides basic pension provision to prevent poverty in old age. Men over 65 and women over 60 are entitled to claim. From 2010, the state pension age for women will start to rise from 60, eventually reaching 65 by 2020. [1]

Basic State Pension (BSP)

Qualification for Basic state pension is based on National Insurance contribution history. For someone with the full number of qualifying years, it is payable at a flat rate of £84.25 per week (2006/07). A lower amount of is payable for someone with fewer qualifying years. Dependents additions are also payable - where the dependent does not qualify for State Pension in their own right or where they have not yet reached State Pension Age. An Age Addition was introduced in 1971 with 25p per week added to the State Pension for people aged 80 or over. It remains at this level.

Additional Pension

Graduated Pension

State Earnings-Related Pension Scheme (SERPS) From 6th April 1978 to 5th April 2002. Qualification based on band earnings above a Lower Earnings Limit (LEL) in each year. The LEL (£84 per week /£4368 pa in 2006/07) is usually set at the same level as the BSP (£84.25) and increases when it does. Band earnings lie between the LEL and an Upper Earnings Limit (UEL) at which National Insurance contributions cease to be payable by the employee (£645 per week/£2,795 per month in 2006/07). The UEL is also adjusted annually.

State Second Pension (S2P) From 6th April 2002 onwards. Qualification based on earnings at, or above, the LEL, but no band earning calculation is made until earnings reach a higher base (£12,500 pa in 2006/07) called the Lower Earnings Threshold (LET). Earnings below the LET (but above the LEL) are credited up to the LET.

Other State Provision

Concepts

Continuation of earnings.

Tax Advantages

Growth free from capital gains tax, corporation tax and income tax. Proceeds exempt from inheritance tax.

Approval

To gain the tax advantages the scheme must seek approval from the HM Revenue and CustomsHMRC.

Compulsory Purchase Annuities

An annuity purchased with pension scheme proceeds taxed as earned income.

Occupational Pensions

Types:

Old Code
Defined benefit DB
Money purchase DC
Executive pension plans EPPs
Small self administered schemes SSASs
Funded unapproved retirement benefit schemes FURBS
Unfunded unapproved retirement benefit schemes UURBS

Individual Pensions

Types