Contract-based schemes are provided by insurance companies and other pension providers. They’re effectively a contract between you and the pension provider.
- Personal pensions
- Self invested personal pensions (SIPP)
- Stakeholder pension schemes
- Retirement annuity contracts
- Buyout policies
How contract-based pension schemes work
Contract-based pension schemes are individual contracts between you the member, and the pension provider. The pension provider is often an insurance company or an investment platform, although there are also a number of independent providers.
Some contract-based pensions may be offered by employers and, although it may look similar to an employer-sponsored workplace pension, the pension will remain an individual contract between you and the pension provider. Examples include:
- Group personal pensions (GPPs)
- Group self-invested personal pensions (GSIPPs); and
- Group stakeholder pensions (GSHP).
Contract-based pensions are money purchase schemes. The value of your retirement benefits are determined by the amount of contributions that have been made, the period that each contribution has been invested, and the investment growth over this period less charges.
Although the employer may choose to contribute to such schemes, there is no obligation that they do so, except if it’s being used as the scheme for automatic enrolment. Where an employer does contribute, they may require that you also contribute; this could be a fixed amount. In some cases, the employer may also pay a higher percentage of your earnings if you do likewise. This is known as a ‘matching’ arrangement.
You can contribute if you’re employed, self-employed and even if you’re not working, subject to certain limits. You can also contribute to someone else’s contract-based pension, for example, a parent may contribute to a child’s, or someone else can contribute to your contract-based pension.
Contract-based pensions are flexible and portable. If you change jobs, or stop working, you can continue contributing, and, if you join a new employer, they may also decide to contribute to it. Since 2006, there has been no restriction on the number of different pension schemes that you can belong to, although there are limits on the total amounts that can be contributed across all schemes each year if you’re to receive tax relief on contributions. If you do have a number of pension arrangements you may decide to combine some or all of them to make it easier to keep track of them.
Under current legislation, you can commence drawing retirement benefits from the age of 55 and you don’t have to stop work to draw benefits. This means that you do not need any employer’s permission to take your benefits, although some employers may have restrictions on drawing a pension that they provide and continuing to work for them at the same time.
Alternatively, you may be able to draw retirement benefits before age 55, if you’re retiring because of ill-health.
Normally, up to 25% of the accumulated fund can be withdrawn as a tax-free cash sum with the balance used to provide an income. You can also draw down amounts up to the whole value of your remaining pension fund as taxable lump sums, subject to being in an arrangement which allows this. In addition, you also have the option to receive a regular income, the amount of income you will receive depends on the options that are selected. These include the income continuing to be paid to your dependant on your death, income increasing each year to offset the effects of inflation and the frequency at which the income is paid.
Pensions that are paid are liable to income tax, but are not liable to National Insurance contributions.
Where can I find out more?
If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.