Personal Pensions
Personal Pension Plans (PPPs) were originally designed for the millions of employed & self-employed individuals who did not have access to a company pension scheme.
Introduced in July 1988, they were part of a government push to extend pension choice & encourage those people not in company schemes to build up a retirement fund; one that could cater for their retirement needs more realistically than the state. Many financial institutions offer PPPs, though most are run by the large insurance companies and banks.
We can research the whole market on your behalf to find a suitable pension plan, it may be that a PPP meets your needs for retirement provision. Following the sweeping changes made on the 6th April 2006 to pension legislation (see section on Pension simplification) these contracts are very flexible and can allow contributions to be made of up to 100% of your earnings. Furthermore these plans can be set up for non-working spouses and even children and grandchildren where up to £3600 can be invested annually. (The annual allowance and Lifetime allowance applies)
How they work
Unlike some company schemes, all personal pensions work on a ‘money purchase’ basis. This means that the money you save each month or each year into your Personal pension plan is invested (typically in investment funds) and is then used at retirement to provide you with pension benefits. So in theory the more you save the better your pension should be at retirement.
At Retirement
On reaching retirement, you use the money that has built up in your personal pension to purchase pension benefits, these benefits can be taken in the form of either income or income with a tax free lump sum (The Pension Commencement Lump Sum). Or the benefits can be transferred to another type of plan which provides unsecured pension benefits (see section on Income Drawdown / Pension Fund Withdrawal), these types of plan allow additional flexibility in that pension benefits can be drawn whilst your pension fund remains invested.
The value of your pension at retirement is mainly dependent upon:
* How much money you've paid in over the life of the plan
* How well the money has grown
* The annuity rate that the provider applies to your pension fund (if you choose to take an annuity)
* Level of Pension Commencement Lump Sum taken. (Up to a maximum of 25% of your pension fund can be drawn as capital)
* The charging structure of the plan
So a Personal Pension Plan is really just a long term savings plan (albeit a very tax efficient one) that is designed to produce a fund at retirement.
At retirement provision can be made to protect your pension from the eroding effects of inflation, protect your income in the event of your death and make provision for your spouse or dependants. (see the Annuities page). Benefits can currently be drawn from age 55 onwards.
Personal Pensions
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Personal pension plans (PPPs) are designed for the millions of employed & self-employed individuals who do not have access to a company pension scheme.
Introduced in July 1988, they were part of a government push to extend pension choice & encourage those people not in company schemes to build up a retirement fund; one that could cater for their retirement needs more realistically than the state. Many financial institutions offer PPPs, though most are run by the large insurance companies and banks.
Eligibility
Since 6th April 2001 there has been some additional flexibility. It is no longer a requirement for an individual to have net relevant earnings in order to be able to contribute to a personal pension plan. An annual contribution of up to £3,600 (gross) can be paid into a PPP without evidence of earnings. In addition, 'third party contributions' are permissible, for example, a working spouse can pay up to £3,600 p.a into a PPP for the benefit of their non-working spouse and even for the benefit of their children. These contributions are, of course, in addition to the contributions which the working spouse can pay in their own right for their own benefit.
There are instances in which it is possible for an individual to contribute up to £3,600 p.a. into a personal pension plan whilst they are simultaneously accruing benefits under an occupational pension scheme under the 'concurrency provisions'. Although an individual can contribute to an unlimited number of personal pension plans during a tax year, the individual's contribution limit set by legislation must not be exceeded.
How they work
Unlike many company schemes, all personal pensions work on a ‘money purchase’ basis. This means that upon reaching your retirement date, you use the money that has built up in your personal pension to purchase an annuity. It is the annuity which then provides you with income in your retirement. So it follows that the value of the pension at retirement, is dependent upon:
* How much money you've paid in over the life of the plan
* How well the money has grown
* The annuity rate that the provider applies to your pension fund
* The ongoing tax status of Personal Pensions as decided by the Government
In other words a personal pension is just a long term savings plan (albeit a very tax efficient one) that is designed to produce a fund at retirement. This then purchases an annuity which in turn provides the retirement income. There are also additional benefits for dependants. There is also a special type of personal pension used for ‘contracting out’ of S2P (state second pension) called an 'Appropriate Personal Pension’ or APP.
What you get & when you get it.
With a personal pension, you are allowed to start taking your pension at any time between the ages of 50 and 75. Furthermore, you do not have to stop work in order to start taking your pension, although you would be well advised to keep up with your contributions and delay drawing your pension for as long as possible. Though retiring at fifty might sound tempting, building up enough money to provide a decent retirement income would probably prove very difficult.
Protected rights derived from contracting-out of S2P can only be paid from the age of 60. Mention could also be made of phased retirement (encashing a set number of segments annually to provide tax-free cash and pension to suit annual requirements whilst leaving the remainder invested) and income drawdown which was introduced by the Finance Act 1995.
Tax free lump sum
You are allowed to take up to 25% of your fund at retirement as a tax-free lump sum, thereby leaving only 75% of the fund to provide your regular pension income.
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