Personal Pension Schemes
Those individuals that do not have access to Company schemes have the option of investing in a personal pension.
When a personal pension policy is taken out, the policyholder becomes a member of the personal pension scheme run by the company that issues the policy.
Personal pensions do not, in any way, provide benefits linked to final salary. They operate on a money purchase basis whereby the contributions are used to provide a fund, which is invested on a tax-free basis.
Upon retirement, the accumulated fund is used to provide an income.
Thus the amount of pension will depend on the level and period of contributions, the investment returns achieved and the annuity rates applicable at the date of retirement.
There are a range of options available at retirement, including the facility to take a tax-free cash sum (currently up to 25% of the total fund value). There are 3 forms in which the pension fund can be used to provide an income including taking an annuity, income drawdown and phased retirement.
Stakeholder Pensions
In an increasing effort by the Government to increase personal pension planning provisions, the Stakeholder pension model was introduced in April 2001. Stakeholder Pensions are quite simply lower charging personal pensions.
The main features and benefits of personal pensions are as follows:
- Eligibility : There is no minimum age before an individual can contribute to their own stakeholder contract. This means that you do not have to be in receipt of earned income in order to contribute. Therefore, parents can make payments on their child’s behalf or a working spouse can contribute on behalf of their non-working partner and still benefit from tax relief.
- Contribution Limits : A maximum of £3,600p.a per person (including tax relief) may be paid or the equivalent of your annual salary if higher.
- Contract Limits : Recent changes in legislation now mean that the maximum pension you have is based on a maximum fund size at retirement, known as the lifetime allowance. This limit is increased annually.