As a self-employed
person, there are a few options available if you wish to save for
retirement in a pension arrangement. Those options are - a
personal pension plan, a stakeholder pension scheme or a
self-invested personal pension plan (SIPP).
Personal Pension Plans
A personal pension plan is an investment policy
for retirement, designed to offer a lump sum and income in
retirement. It is available to any United Kingdom resident who is
under 75 years of age and can be bought from insurance companies,
high street banks, investment firms and some retailers (i.e.
supermarkets and high street shops).
They are money purchase arrangements. This means
that a member contributes to the plan, the money is invested and a
fund is built up. The amount of pension payable when the member
retires is dependent upon:
- the amount of money paid into the scheme;
- how well the investment funds perform; and
- the 'annuity rate' at the date of retirement. An
annuity rate is the factor used to convert the 'pot of money' into
a pension.
The member can retire at any age between 55 and
75. When they do retire, they can generally take up to 25% of the
value of their fund as a tax-free lump sum. The remainder of the
fund can be used to buy an annuity with an insurance
company.
Full details can be found in the
personal pension section of this site.
Stakeholder Pension Schemes
A stakeholder pension scheme is a type of
personal pension plan. In other words, it is a money purchase
arrangement designed to provide a lump sum and income in
retirement. Like a personal pension plan, it is available to any UK
resident under the age of 75 and be bought from insurance
companies, high street banks, investment firms and some
retailers.
A stakeholder pension scheme has been designed to
incorporate a set of minimum standards laid down by the Government.
These include:
- a charging structure capped at 1.5% of the fund
each year for the first 10 years and 1% a year thereafter;
- no penalties on increasing, decreasing, stopping
and restarting contributions;
- no penalties on transferring the fund to another
pension arrangement; and
- a minimum contribution of £20.
Full details can be found in
the stakeholder pension section of this site.
Self Invested Personal Pension (SIPP)
A SIPP is also a type of personal pension
plan. It follows the same basic rules with regards
contributions, tax relief and eligibility. The difference is
the investment freedom that a member has and the ability to borrow
against the fund for further plan investments.
A conventional personal pension generally
involves the planholder paying money to an insurance company for
investment in an insurance policy. The choice of investments
is limited to that offered by the plan provider.
A SIPP allows the plan holder much greater
freedom in what to invest in and for the plan to hold these
investments directly. The plan holder can have control over
the investment strategy or can appoint a fund manager or
stockbroker to manage the investments.
The SIPP itself is established under a
trust. The trustee controls the investment under instruction
from the member. It is possible for the plan holder to be the
trustee. If this is the case, an approved administrator must
be appointed to carry out investment transactions.
A SIPP can borrow money against the value of the
fund for investments that the trustees consider will benefit the
scheme (for example, commercial properties). It can
borrow, at any time, up to 50% of the scheme's assets.
Full details
can be found in the SIPP section of this site.
