Private Pensions
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.
Currently the member can retire at any age between 50 and 75. From 6 April 2010, the minimum age will rise from 50 to 55. When he does retire, he can generally take up to 25% of the value of his fund as a tax-free lump sum. The remainder of his fund must 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 plan holder 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.
