Personal Pensions

Personal pension plans (PPPs) are designed for the millions of employed & self-employed individuals who do not have access to a company pension scheme.

Introduced in July 1988, they were part of a government push to extend pension choice & encourage those people not in company schemes to build up a retirement fund; one that could cater for their retirement needs more realistically than the state. Many financial institutions offer PPPs, though most are run by the large insurance companies and banks.

Eligibility: Since 6th April 2001 there has been some additional flexibility. It is no longer a requirement for an individual to have net relevant earnings in order to be able to contribute to a personal pension plan. An annual contribution of up to £3,600 (gross) can be paid into a PPP without evidence of earnings. In addition, 'third party contributions' are permissible, for example, a working spouse can pay up to £3,600 p.a into a PPP for the benefit of their non-working spouse and even for the benefit of their children. These contributions are, of course, in addition to the contributions which the working spouse can pay in their own right for their own benefit.

There are instances in which it is possible for an individual to contribute up to £3,600 p.a. into a personal pension plan whilst they are simultaneously accruing benefits under an occupational pension scheme under the 'concurrency provisions'. Although an individual can contribute to an unlimited number of personal pension plans during a tax year, the individual's contribution limit set by legislation must not be exceeded.

How they work: Unlike many company schemes, all personal pensions work on a ‘money purchase’ basis. This means that upon reaching your retirement date, you use the money that has built up in your personal pension to purchase an annuity. It is the annuity which then provides you with income in your retirement. So it follows that the value of the pension at retirement, is dependent upon:

* How much money you've paid in over the life of the plan
* How well the money has grown
* The annuity rate that the provider applies to your pension fund
* The ongoing tax status of Personal Pensions as decided by the Government

In other words a personal pension is just a long term savings plan (albeit a very tax efficient one) that is designed to produce a fund at retirement. This then purchases an annuity which in turn provides the retirement income. There are also additional benefits for dependants. There is also a special type of personal pension used for ‘contracting out’ of S2P called an 'Appropriate Personal Pension’ or APP.

What you get & when you get it: With a personal pension, you are allowed to start taking your pension at any time between the ages of 50 and 75. Furthermore, you do not have to stop work in order to start taking your pension, although you would be well advised to keep up with your contributions and delay drawing your pension for as long as possible. Though retiring at fifty might sound tempting, building up enough money to provide a decent retirement income would probably prove very difficult.

Protected rights derived from contracting-out of S2P can only be paid from the age of 60. Mention could also be made of phased retirement (encashing a set number of segments annually to provide tax-free cash and pension to suit annual requirements whilst leaving the remainder invested) and income drawdown which was introduced by the Finance Act 1995.

Tax free lump sum: You are allowed to take up to 25% of your fund at retirement as a tax-free lump sum, thereby leaving only 75% of the fund to provide your regular pension income.