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If you do not have a pension set up by your employer, or you are self-employed, then these were designed with you in mind. Although Stakeholder Pensions may offer better value in some cases, Personal Pensions are still being sold and can offer a wider investment choice
To compete alongside Stakeholder Pensions, many Personal Pensions have also reduced their charges. As with Stakeholder Pensions, you can use a Personal Pension to opt out, known as 'contracting out' of the State Second Pension (S2P). This means that any second income you get on top of your basic State Pension will come from your Personal Pension, not the State.
How do they work?
Usually, you can put money into the scheme each month, although you can add lump sums whenever you want. Pension contributions are entitled to tax relief, which means that the government adds on basic rate tax relief - so for every £78 you invest, the Inland Revenue tops this up with £22 to £100. If you are a higher rate tax payer, you'll need to claim higher rate tax relief yourself, topping up the tax relief from £22 to £40.
This money is then invested - again you usually get a choice - in a range of investment funds. The fund then grows free of tax to produce a tax-free lump sum when you retire. Most of this (75 per cent) must be used to buy you a pension income for life - known as an annuity - by the age of 75, with 25 per cent being able to be taken as a tax-free lump sum.
Pros and cons of Personal Pensions
Pros
- You can take it with you every time you change employer and continue to pay into it
- Most plans are flexible, letting you increase or reduce how much you are regularly paying into it without penalties
Cons
- Some Personal Pensions have higher charges than Stakeholder Pensions
- Some have hidden costs and penalties if you change provider, move to a Stakeholder Pension or decide to retire earlier or later than you originally agreed
More information on Personal Pensions:
How much can I invest?
There is no set minimum you can invest, but many pension providers accept contributions from £20 a month. The government currently has also set limits on the amount you can put in. This is because you get tax relief on the amount you put into the plan and because there is no income tax or capital gains tax paid inside the fund that you invest in. From April 2005 - if government proposals are turned into law - these restrictions will no longer apply.
What happens when you retire?
Under the present rules, you can take the benefits from your pension plan any time between your 50th and 75th birthdays. From 2010 the minimum retirement age will rise to 55.
When you decide to retire, your pension provider works out how much your fund is worth. You're then allowed to take up to 25 per cent of this value in cash - free of tax. The remaining 75 per cent of the value of the fund is used to give you an income each year for the rest of your life. To provide this income you must buy what is known as an annuity, by the time you are 75. You don't have to buy it from your pension provider, you can shop around to see if you can get a better deal.
How do you take out a Personal Pension?
You can contact many pension providers direct - look out for advertisements in the financial pages of the national newspapers and magazines. Or, you can ask an Independent Financial Adviser or Specialist Pensions Adviser to set up a plan for you.
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