Pensions Guide: Private Pensions

It’s now unlikely that the state pension will be enough to keep you living comfortably when you retire. It provides only basic support, and the government itself is keen to encourage people to save as much as they can to supplement their state pension and give themselves a comfortable income in retirement. Combined with better health in the general population – meaning longer life expectancies – and dwindling stock market returns over the last decade or so, the so-called ‘pension crisis’ is a call to action for people to plan their finances carefully and put more and more cash aside to ensure a safe and secure future for themselves.

This article is the second of two guides examining the fundamentals of pensions. The first guide focuses on state pension provision, while this one outlines some of the possibilities for making personal pension arrangements. They are intended for information only and do not constitute financial advice. It is recommended that you speak to a financial advisor for professional advice on planning your finances for retirement.

Saving for the future

There are lots of ways in which you can save for the future – savings accounts, stocks and shares and property investment, for example. However, all of these are subject to tax. Pension schemes are much more tax-efficient as tax relief is given on contributions made and the income they provide during retirement is tax-free. This is why pensions are a common way of saving for retirement.

There are two main types of personal pensions – final salary and money purchase. The first can only be provided through occupational schemes, but the second can be purchased privately on an individual basis.

Final salary

Final salary schemes, also known as defined benefit schemes, provide a guaranteed income based on a percentage of salary earned during your final year of work as well as length of service with the company. It’s possible to retire on up to two thirds of your final salary.

As it guarantees to provide a certain level of income, it’s often considered to be the best type of pension scheme available. However, there has been a decline in the number of employers offering final salary schemes in the last few years because of the expense of maintaining them. Falls in the stock market have seen many pension investment funds drop drastically in value, meaning that the employer must make up the difference in order to provide the guaranteed income to the scheme’s members. Another expense for employers with final salary schemes is the 10% tax levied on dividends, a measure introduced by the government in 1997, which again can have a detrimental impact on the size of pension funds.

Money purchase

With money purchase schemes, also know as ‘defined contribution’ plans, members make payments into a fund which is then invested into the stock market. On retirement, the accumulated funds are used to buy what’s called an annuity, which provides a regular retirement income. The amount you’ll receive in retirement isn’t guaranteed – it depends on how well the stock market has performed and on annuity rates at the time that you take out your annuity. Whereas final salary pensions put the burden of risk on the employer, who must make up the amount to a guaranteed level, it’s the member who’s responsible for the risk of a shortfall in money purchase schemes. Members may therefore need to save more cash independently to ensure they’ll have a comfortable retirement.

You’ll have some flexibility to choose what funds your money is invested in, and your decisions will depend on your attitude to risk. Higher risk investments can provide much greater potential returns, but at the same time can also make the biggest losses. ‘Safer’ investments will reduce the risk of losses but will not be likely to yield as big returns as higher risk investments.

Annuities

An annuity is a fixed, regular amount of money paid to someone, usually for the rest of their life, which is purchased using a lump sum from a pension fund, for example. It’s invested in the stock market, usually in funds considered to be safe. Annuity rates have plummeted in the last decade, meaning that many people are now expecting lower annuity incomes and are having to change their retirement plans. However, there are various different options when it comes to annuities. Members aren’t obliged to take out the annuity offered by their own scheme – they can use their accumulated pension funds to buy an annuity from any annuity provider on the open market, where they may be able to get a better rate. It’s also possible to take up to 25% of the pension fund as a tax-free cash lump sum, leaving the other 75% to purchase an annuity. A third option is to take out a short-term annuity of up to five years to keep your pension invested for a little longer in the hope that it will increase in value to allow you to purchase a better lifetime annuity further down the line. Another way of delaying taking out an annuity is to receive an income directly from your pension fund, keeping it invested in the hope of gaining higher returns to sustain the income received.

However, the value of the funds could fall just as easily as they could rise, which may leave you worse off. This option is known as an ‘unsecured pension using income withdrawal’. Finally, it’s possible not to purchase an annuity at all and instead receive an income directly from your pension fund from the age of 75 with an ‘alternative secured pension’. Before 2006 it was a legal requirement to purchase an annuity from pension funds by the age of 75, but the law changed to allow people over 75 to receive this type of income instead, although the total amount of income that can be drawn down from it is 70% of a lifetime annuity. It’s intended for people who are opposed to purchasing annuities on ethical grounds as a result of their religious beliefs.

Stakeholder schemes

Stakeholder pensions were set up by the government in 2001 with the aim of facilitating access to personal pensions for people whose employers don’t run occupational schemes. As with money purchase plans, stakeholder pensions invest in the stock market, bonds and cash savings accounts and accumulate funds which are used to purchase an annuity upon retirement. They’re designed to be easy to understand, flexible and lower cost than other pension plans. The maximum charge that administrators will be able to charge each year for managing the funds is 1% of the value of the fund, and they cannot charge penalties if members wish to transfer cash in or out or stop contributing. However, there’s a limit to the amount that can be invested, so they’re designed for people on low to middle incomes rather than high earners.

A Tax Lawyer To Your Rescue

The IRS induces fear in people because they are unable to understand the complexities of filing returns. Every year several thousands of people are unable to pay their taxes or file wrong amount of money because they are unable to calculate their taxes correctly. For all these reasons you must always consult a tax lawyer before filing your returns because then you would not face any difficulties.

A tax lawyer is a person who has the necessary qualification and expertise to guide you in filing your returns at a nominal cost. A tax lawyer can represent you and fight your case while you carry on with the other important things in your life. If you were involved in any tax fraud case, then the IRS tax lawyer can assist you by guiding you out of the mess.

A tax lawyer is essential because the complexities of tax rates and tax brackets are next to impossible for a layman to understand properly. The deductions and intricacies of calculating the right amount of taxes are best left for a lawyer who specializes in tax. They can really help you out with your tax deduction and would also give you the right advice about investing in businesses that would further deduct your income tax.

A tax attorney is better suited than CPAs and if you are dealing with a lot of money then you must always select a lawyer because they have better knowledge than CPAs and would give you the right kind of advice. Though CPAs would charge you less as consulting fees but they might commit errors which would prove fatal to your business.

State and federal tax authorities are impossible to consult because they hardly pay attention to your worries, while a tax lawyer would listen to your problems attentively and solve all your tax related problems. There are several tax relief programs available which a common man is unaware of, but with the right kind of tax attorney by your side, you can surely get access to all tax benefits.

For all these reasons you must choose a lawyer to guide you in filing your returns. Further, they can also provide you investment advice, trust fund recovery advice and various other advices that would be crucial to your business. However, while selecting a tax attorney you must always look at his qualifications so that you get the best advice possible.

In Tax Return Preparation, Tax Attorney Is a Wise Investment

Just the mention of the word tax would send an eerie feeling to many individuals. However, every person must accept the fact that paying tax burdens is part of the duty as a citizen of a state. You are left with no choice but to pay tax liabilities. If you don’t, you are to suffer tax penalties, fines, or even imprisonment. Moreover, it is better to comply with your duties on time to preclude you from further troubles with the government. Before a taxpayer can pay his taxes, he must first prepare his tax return. Tax return preparation is one ordinary thing to individuals earning income. This is because all income earners are duty-bound to pay taxes to the government. Taxes are paid annually. Hence, before the scheduled time for the collection of tax contributions, the taxpayer must already be ready.

Tax return is the official document given to taxpayers for them to list their tax contributions for a certain period. It is necessary that this document be prepared and submitted early in time so as to avoid penalties.

Preparing a tax return can be done personally by the taxpayer. This is if he is keen in doing the task on his own. However, if you want an easier way, there are currently advanced software that are especially designed to prepare tax returns. Taxpayers can use said software to help them compute tax contributions. This software can be had online. You just have to download and install it in the computer after that you will be able to use it to ease the burden of tax return preparation.

If you do not want the software, you can hire the services of expert tax return calculation personnel. You just have to be certain that the person you hire is the best that you can have. Better yet, hire the services of a tax attorney.

A tax attorney guides a client to avoid future tax problems. He also defends clients in cases of criminal and civil suits regarding tax troubles. When a taxpayer has trouble with the state department of revenue or Internal Revenue Service, he may opt to remedy it himself or hire the services of a tax attorney. However, the taxpayer can be better served by a tax attorney.

Tax attorneys specialize in solving tax problems with the IRS. They are experts in taxation issues and relief. Nonetheless, they are considered a great help in advising their clients on how to lessen their tax liabilities. They also can also give valuable advice on what exemptions are available to them. They can also give the demarcation line between legal and illegal ways of reducing or avoiding taxes.

One important thing in hiring the services of lawyers is that they must be equipped with knowledge and expertise about the subject matter. Alabama tax attorney, for instance, is an expert in terms of Alabama taxation laws. If you are a resident of Alabama, it is better to hire the services of a good Alabama attorney to assist and defend you.

Knowledge and expertise are boosted by the fact that the tax attorney is also a resident of your state. Hence, it can be presumed that he is updated with the laws and customs of the land than other lawyers.

Bear in mind that tax return preparation is an important process in taxation. One mistake can invite criminal actions and penalties. Moreover, it is better to consult a trusted tax attorney in your territory. A good tax attorney is considered a taxpayer’s wise investment.