Personal pensions are a flexible way to build up retirement income benefits, while benefiting from tax advantages, whether you’re employed, self-employed or not working.
How personal pensions work
Personal pensions are a type of defined contribution pension scheme.They are individual contracts between you and the pension provider and are set up by you, the member. The pension provider is often an insurance company, although there are also a number of independent providers.
You can have a personal pension if you're employed, self-employed or not working. If you’re employed, your employer can also contribute to your personal pension.
Other people are also able to contribute, and you can contribute to other people’s personal pensions. For example, you could contribute to your spouse’s or partner’s personal pension, or even to a child’s personal pension to allow them to start building up retirement benefits from an early age.
There are no restrictions 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.
This means you can have a personal pension to provide additional retirement benefits, even if you’re a member of a workplace pension scheme. Most personal pensions are flexible and portable. If you change jobs, or stop working, you can normally continue contributing to a scheme.
Contributions and Investments
All contributions that are made to your personal pension are invested and you can normally choose from a wide range of funds. There can be many different funds to choose from, although a provider can restrict the number of funds they offer you. You should also be able to switch between funds, should you wish to although there may be a charge associated with this.
Different funds have different risk profiles. While higher risk funds can potentially provide higher returns over the longer term, these returns can be unpredictable. Whichever fund or funds you invest money in, the value of these funds can go down as well as up.
Deciding which funds to invest in can be a complicated and time-consuming process, and you may wish to seek advice. Our pensions specialists are happy to answer your queries, or to find out more please click here.
Drawing pension benefits
Personal 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, investment growth over this period and the level of charges.
Under current legislation, you can commence drawing retirement benefits from the age of 55 (or possibly earlier, if you’re in ill-health);. You don’t have to stop work to draw benefits. Up to 25% of your accumulated fund can be withdrawn as a tax-free cash lump sum with the balance used to provide an income.
When taking benefits from a defined contribution pension schemes, you may be able to draw down amounts up to the whole value of your remaining pension fund as taxable lump sums, as well as having the option to receive a regular income.
When you decide to receive a regular income, the amount of income you receive depends on the type of pension that you’ve selected. Options include:
- Choosing a level income or one that increases once in payment;
- Providing a continuing income for your dependants on your death; and
- Guaranteeing payment of your income for a set number of years.
Pensions in payment are taxed as income, but you do not pay National Insurance contributions on pension income.
Group personal pensions (GPPs)
Group personal pensions are a type of personal pension, which your employer may offer to you and your colleagues. Even though GPP are arranged by your employer, the contract still remains between you and the pension provider. Group personal pensions may have lower charges than individual personal pensions, because the provider may offer the employer a discount for the volume of policies. Your employer may also choose to contribute to your pension, but there is no obligation that they do so, unless the GPP is being used for automatic enrolment purposes.
Like personal pensions GPPs can be flexible and portable, and if you change jobs, or stop working, you may be able to continue contributing to the plan. If not, you can keep the money invested until you decide to draw your pension benefits. Or alternatively, if you join a new pension scheme with a new employer, you may decide to transfer the amount held into your new arrangement.
Can I change the amount I pay into my personal pension?
You should check with your pension provider, although this should not be a problem.
Can I pay a lump sum into my personal pension?
Normally, a provider will allow you to make lump sum payments, but you should contact your pension provider.
Can I set up a personal pension for my child and make payments into it?
Yes. Payments that you make to your children’s GPPs will receive basic-rate income tax relief at source. Any higher- or additional-rate tax relief can only be claimed by the member (e.g. your children, in this example). You can also contribute into anyone else’s personal pension, for example, a spouse’s or partner’s personal pension.
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.