What is a Personal Pension Plan?

A method of saving for retirement which attracts tax relief on the contributions made and offers tax efficient returns on any growth.

When can it be used?

Personal Pension Plans are sometimes offered by employers; known as Group Personal Pension (GPP) Plans or an individual can start one themselves.

They are used for building up money which is then generally used to provide an income in retirement.

Main features

Personal Pensions are sometimes provided by an employer or they can be taken out individually.

If taken out individually, you choose the provider of the plan and contributions are made net of basic rate tax, which means that you will only actually contribute £80 for every £100 of contributions paid.

Higher rate and 50% taxpayers also make contributions net of basic rate tax and can then claim additional relief via their Self Assessment return.

Tax relief will be granted on personal contributions subject to the greater of:

  • £3,600 gross per annum; and
  • 100% of relevant earnings, limited to £50,000 from 6th April 2011 (salary, bonuses and benefits in kind)

If you are in a GPP run by your employer, they will have chosen the pension provider and they will have arranged for contributions to be paid from your wages or salary. The employer may also contribute to the scheme although they are not currently obligated to do so. Your employer deducts contributions from your pay and sends them to the pension provider. The pension provider claims tax relief at the basic rate and adds it to your fund. If you are a higher rate or 50% taxpayer, you will need to claim the additional rebate through your tax return.

However you access a Personal Pension Plan, you will be able to choose from a range of funds to invest in, with the aim of growing the size of your pension pot over the years to retirement. The fund will grow with no liability to tax on capital gains and all forms of investment income, except dividends, will be tax free.
Many pension providers offer not only funds run by themselves but also funds run by other investment houses, this tends to differ from Stakeholder Pension Plans.

Unlike Stakeholder Pension Plans, there is no maximum amount that can be charged by the provider of a Personal Pension Plan, consequently each provider varies in the charges that they make.

The value of the fund which has been built up to provide you with retirement benefits will be payable should you die before taking your benefits. This lump sum would normally be paid free of Inheritance Tax.

From April 2010, the plan can be accessed from age 55.

When you retire, you can take a tax-free lump sum from your fund and use the rest to secure an income, using whichever method is suitable for your circumstances and attitude to risk.  The most common way of taking an income is to purchase a Lifetime Annuity, but there are several different ways in which you can potentially benefit from the funds you have accumulated.

The amount of pension income you’ll get will depend on:

  • How much you pay into the fund
  • How much, if anything, your employer pays in
  • How well your investments have performed
  • What charges have been taken out of your fund
  • How much you take as a tax-free lump sum
  • The type of pension income product you choose
  • Annuity rates at the time you retire

Advantages

  • Contributions receive tax relief
  • The fund will grow with no liability to tax on capital gains
  • Plans are often flexible with no penalties for stopping and starting contributions or retiring early
  • Personal Pensions often offer a wide variety of funds in which to invest. Many providers offer funds from external fund houses thereby widening the investment choice available to the investor
  • Lump sum death benefits are normally payable free of Inheritance Tax
  • At retirement you have the option to take up to 25% of the fund as a tax-free cash lump sum

Disadvantages

  • Once money has been paid into a Personal Pension Plan it cannot be accessed until age 55 at the earliest
  • The charges on a Personal Pension Plan can be higher than those levied on a Stakeholder Plan

Next Steps

Making the decision between the various options you have to save for retirement requires careful consideration and full knowledge of all the choices available to you. At Investment Sense we believe in providing you with as much help as possible to make your decision.

If you have existing pension funds, then take advantage of our free pension review service, where we will project the possible future values of your pensions funds, click here to learn more.

If you would like advice on this important area of your financial planning, we offer initial meetings with no cost or obligation. We will prepare a report into your options and present it to you, allowing you to make an informed decision.

Should you wish to make an enquiry or receive advice, please complete the enquiry form on this page or call us on 0845 074 7778.