The Personal Pension
A personal pension is one that you take out yourself, for example if you're self-employed or your employer doesn't offer a pension arrangement. They are a type of money purchase pension.
You choose the provider and make arrangements for your contributions to be paid. The provider claims tax relief at the basic rate and adds it to your fund. If you are a higher rate taxpayer, you will need to claim the additional rebate through your tax return. You also choose where you want your contributions to be invested from the range available from your provider.
How does it work?
The fund builds up using your contributions, investment returns and tax relief. It helps to think of money purchase pensions as having two stages:
Stage 1
The fund is usually invested in stocks and shares, along with other investments, with the aim of growing the fund over the years before you retire. Remember though that the value of investments may go up or down.
Stage 2
When you retire, you can take a tax-free lump sum from your fund and use the rest to secure an income – usually in the form of a lifetime annuity.
The amount of pension income you'll get will depend on:
- how much you pay into the fund;
- how much, if anything, your employer pays in;
- how well your investments have performed;
- what charges have been taken out of your fund by your pension provider;
- how much you take as a tax-free lump sum;
- annuity rates at the time you retire; and
- the type of annuity you choose.
Group personal pensions
Some employers offer these schemes. They build up a personal fund for each employee which is converted into an income when you retire. They are a type of money purchase pension. The scheme is run by the pension provider that your employer chooses, but it is an individual contract between you and the provider. The provider claims tax relief at the basic rate and adds it to your fund. If you are a higher-rate taxpayer, you will need to claim the additional rebate through your tax return.
How does it work?
The pension fund builds up using your contributions and, where they are made, your employer’s contributions, investment returns and tax relief. It helps to think of money purchase pensions as having two stages:
Stage 1
The pension fund is usually invested in stocks and shares, along with other investments, with the aim of growing the fund over the years before you retire. Remember though that the value of investments may go up or down.
Stage 2
When you retire, you can take a tax-free lump sum from your fund and use the rest to secure an income – usually in the form of a lifetime annuity.
The amount of pension income you’ll get will depend on:
- how much you pay into the fund;
- how much, if anything, your employer pays in;
- how well your investments perform;
- the charges taken out of your fund by your pension provider;
- how much you take as a tax-free lump sum;
- annuity rates at the time you retire; and
- the type of annuity you choose.