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Personal Pensions
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:
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