Personal Pensions
Personal pensions are a special savings vehicle for your retirement. They receive tax relief at source whether you are employed or self employed; you pay a premium net of basic rate tax and any higher relief is claimed via a tax return. Your contributions personal contributions are limited to an amount equal to 100% of your earned income in any one year.
Before stakeholder pensions were introduced from 6 April 2001, the personal
pension was the most popular type of private pension scheme taken out by
an individual. Also for an employer sponsored pension scheme a group personal
pension (GPP) is now more common mainly due to their simplicity and low
administration cost of operation. Since 6th April 2001 stakeholder pensions
have been available and can be used where a personal pension is not appropriate,
for example, when the individual has no taxable earnings.
All personal pensions are contributory schemes and can be taken out by the
self employed or employed as well as allowing an employer to make contributions
directly to the plan. Following changes to legislation effective from the
6th April 2006, an individual can now contribute to a personal pension where
they are already making payments to an occupational pension scheme such
as final salary pension or Contracted In or Out Group Money Purchase Scheme.
Concurrent membership is now permitted.
Generally (there are some small exceptions) the retirement age can be selected
between 50 to 75 (no earlier than 55 from 6th April 2010) and retirement
benefits taken as a pension income provided by a compulsory purchase annuity,
pension annuity or scheme pension and allowing the scheme member a commutation
to a tax free lump sum of 25.0% of the pension fund value. The member could
defer the purchase of an annuity by opting for unsecured pension (pension drawdown) until age
75. At this stage there are 3 options:-
- Alternatively Secured Pension
- Annuity Purchase
- Scheme Pension.
Retirement Annuities/Section 226 pensions
Personal pensions replaced retirement annuity policies (RAPs) and Section 226 policies from 1 July 1988. They are very similar to personal pensions, RAPs contributions qualify for full tax relief, but t. The retirement age is between 60 and 75 and when you choose to take your pension you could get tax free lump sum of up to 33% of the fund value. Your contributions are limited by the percentage allowed for your age and income in the tax year the contribution is made. Both carry back relief and carry forward relief is available on RAPs and they are not restricted to the earnings cap when working out contribution levels; however if you are making contributions to a Personal pension in the same tax year as a RAP then the Personal pension rules apply and the earnings cap is taken into account. Member can continue to make contributions towards RAPs until their actual retirement age; however these schemes are closed to new business.
Section 32 buyout
The paid-up pension rights and entitlements from a previous employment such as an occupational pension scheme can be transferred to section 32 buyout policies. These policies were introduced in 1981 and where the scheme member is transferring guaranteed minimum pension (GMP) rights from a contracted out scheme the revalued GMP rights will be provided at the state retirement age. Benefits can be taken between the age of 50(from 55 after 6th April 2010) and 75 as well as a tax free lump sum.
This type of contract can be very useful if you are in an Occupational pension
Scheme where you are entitled to more than 25% of the fund as tax free cash
and you wish to transfer your bnefits to an alternative e pension provider.
Be careful, however, as this subject can be like a "minefield"
and the repercussions of making the wrong decision could be very expensive.
Seek independent financial advice.
If you would like more information about Personal pensions or Section 32
pension schemes please contact us.
