Personal Pension Guide

 Personal pensions were launched by the government in 1998 to encourage more people, especially the self employed, to save for retirement.

How much can I contribute to a personal pension?

The contribution limits and tax advantages of personal pensions are identical to those of other types of personal pension, such as stakeholder pensions, group personal pensions and Self Invested Personal Pensions (Sipps).

You can invest up 100 per cent of your earned income subject to a limit of £255,000 in the tax year 2010-11.  

Since April 6 2006, it has been possible to pay into a personal pension, as well as other pension schemes, including company pension schemes, providing you do not contribute more than 100 per cent of your earnings in total (subject to the annual contribution limit applicable at the time).

The annual tax free contribution limit will rise each year as follows:

2008-09                                 £235,000

2009-10                                 £245,000

2010-11 to 2015/16            £255,000

Is there a limit on how much I can hold in a personal pension?

The other limit you need to keep an eye on is the lifetime allowance – the name given to the maximum you can hold in any type of pension and still enjoy the tax privileges associated with pensions.

If the total value of all your pensions exceeds this limit (at the time you take your pension), there will be a charge on the excess over £1.8m of 25 per cent if  taken as income, and a 55 per cent charge if taken as cash.

The lifetime allowance will rise each year as follows:

Allowance	Year
1.65m £1.75m	2008-09 2009-10
£1.8m	2010-11

There are complex transitional arrangements for people who had more than £1.5m in total in their pensions before 6 April 2006 (the lifetime allowance in 2006-07) and individuals in this position are strongly recommended to take specialist independent financial advice to protect your position, if you have not already done so.

How do I calculate the value of my pensions for the purposes of the lifetime allowance?

For money purchase (also known as defined contribution) schemes, including any type of personal pension, you use the fund value.

For final salary schemes, you multiply each £1 of pension by £20 to get the fund value for lifetime allowance purposes. For example, a £75,000 pa pension would be valued at £1.5m.

Which companies offer access to personal pensions?

 Personal pensions are offered by a large number of life insurance companies as well as a number of asset management and fund management companies.

Who can contribute to a personal pension?

 To have a personal pension you must be under age 75 and be a resident in the UK, or a Crown servant, or the spouse or registered civil partner of a Crown servant.

What can a personal pension invest in?

 Personal pensions can be invested in a very wide range of investment funds offered by the provider of your choice. Many personal pension providers offer externally managed funds as well as their own in-house funds.

It is not uncommon for a personal pension plan to have a fund choice of 150 or more funds covering the following fund types:                

§  Risk-based managed funds, e.g. cautious, balanced

§  UK and overseas equity funds

§   Index tracker funds

§   Cash funds

§   Gilt and fixed interest (bond) funds

§   With profits funds

§   Property funds

§   Emerging market funds

§   Green/ethical funds

With help from your financial adviser, or by using the fund information and research tools available from product providers, you can ascertain your attitude to risk and the target income you wish to achieve for your retirement, and then select appropriate investment funds accordingly.

Can I change my investment choices?

 You can switch between the investment funds of your provider at any time, but there may be a small charge for switching. Some providers allow a set number of free switches a year.

What happens if I change contribution level, investment funds or switch to another provider?

There should be no charge for reducing or increasing your contribution level (at least not on contracts being sold now). Older contract may still make a charge for this.

What happens to my personal pension when I die?

If you die before age 75 (without having taken any benefits from the fund), the full value of your personal pension will normally be paid as a cash lump sum to your dependants.

If you have a separate ‘protected rights’ fund because you've contracted out of the State Second Pension (formerly known as Serps), this must be used to buy your spouse a pension.

By age 75, you can choose either to convert your personal pension fund into an annuity or take an Alternatively Secured Pension (ASP), which is a restricted form of income drawdown. For more on ASPs, see our Guide to Drawdown.

When can I take the benefits from my personal pension?

You can currently take personal pension benefits any time between age 55 and 75, even if you're still working.  

How can I take the benefits from my personal pension?

At your selected pension date, you have a number of option as follows:

§  use your entire personal pension fund to buy an annuity which will give you a regular taxable income for life;

§  take up to 25 per cent of the fund as tax free cash, and use the balance to provide a (reduced) taxable pension for the rest of your life, via an annuity;

§   give up part of your pension, to provide a taxable pension for your spouse, registered civil partner or other dependant after you die;

§  choose whether you want your pension to remain level throughout your life or to increase automatically each year by a set percentage, (known as escalation) or in line with inflation (RPI- linking);

§   delay the purchase of an annuity until age 75 (or after), but still take up to 25 per cent tax free cash and a  taxable income each year (but there is no obligation to take an income) via Income Drawdown.

DON’T FORGET TO USE YOUR OPEN MARKET OPTION WHEN LOOKING AT YOUR ANNUITY OPTIONS