Personal Pensions

• Tax benefits – Contributions to the pension will attract basic rate (20%) tax relief, which effectively tops up the amount being paid in. For example, a contribution of £80 will attract £20 tax relief, meaning £100 will be invested into the pension. Higher and additional rate tax payers will be able to claim additional tax relief via self-assessment. The pension funds will grow almost entirely tax free and at retirement there will be the option to take part of the pension fund as a tax-free lump sum.
• Contributions – There is no maximum contribution to a personal pension, but there are tax implications of contributing above certain amounts.
  • All individuals (even non-taxpayers) can make pension contributions of up to £3,600 gross in any tax year. Each individual will only have to make a net payment of £2,880 themselves, because basic rate (20%) tax relief is obtained by the pension provider and added to the contribution.
  • If contributions are made in excess of £3,600 gross, the maximum that can be contributed that will qualify for tax relief is 100% of your earnings.
  • There is also an annual allowance, which may change from year to year. If contributions exceed the Annual Allowance there will be a tax charge payable.

Types of personal pension:

• Stakeholder pensions – these work in the same way as personal pensions, but with certain limits in terms of what they can charge and the minimum contribution, set by the Government.
• Self-invested personal pensions (SIPPs) – as an alternative to a traditional personal pension plan run through an insurance company, it is possible to arrange your own plan via a Self-Invested Personal Pension (SIPP), administered by a specialist SIPP provider. This has all the advantages of the conventional pension plan, plus the ability to select your own investments.
• Group personal / stakeholder pensions – an employer can help set up a pension arrangement that groups together individual Personal Pension Plans or Stakeholder Pension Plans.