Personal Pension Plans (PPPs) were originally designed for the millions of employed & self-employed individuals who did not have access to a company pension scheme.
On 6 April 2015 major changes to the ways in which pension benefits can be taken came into force. They are now much more flexible and are for the majority of people the most tax efficient method for saving for your retirement, These type of schemes allow you to invest on a defined contribution basis unless you are lucky enough to be in a defined benefit (final salary) pension scheme .
If you are in a company pension scheme that isn’t final salary based, then it is likely you are in a form of personal pension arrangement. There have also been recent changes to company pension legislation regarding Workplace Pensions (including auto enrolment) and the principle that your pension pot can follow you from employer to employer (pot follows member), the majority of us are now subject to the personal pension rules for our retirement income and final salary schemes are now not as common.
Personal Pensions are very flexible and provide tax relief on your contributions where an individual can contribute up to the greater of £2,880 (£3,600 gross) per annum for those that have no earnings. or up to 100% of earnings subject to a maximum of £60,000 per annum which is the current annual allowance (2023/2024 tax year). For example, if you earn £30,000 but put £35,000 into your pension pot (perhaps by topping up earnings with some savings), you’ll only get tax relief on £30,000.
If you earn £50,000 and want to put the full amount into your pension in a single year you can normally only get tax relief on £40,000. Any contributions over this limit will be subject to income tax at the individual's marginal rate (or rates) of income tax , which is known as an annual allowance charge. However, you can carry forward unused annual allowances from the previous 3 years, providing that you were a member of a pension scheme during those years.
Furthermore these plans can be set up for non-working spouses and even children and grandchildren. You can contribute to a personal pension if you have no earnings for up to £2,880 per annum, topped up by the government with tax relief of 20% to £3,600.
How they work
All personal pensions work on a defined contribution ‘money purchase’ basis. This means that the money you save into your Personal pension plan is invested (typically in investment funds) and is then used at retirement to provide you with pension benefits. So in theory the more you save, the better your pension should be at retirement.
On reaching retirement, you use the money that has built up in your personal pension either as cash (up to 25% of which is normally tax free), income or a combination of both (see About Pension Freedoms ).
A personal pension is really just a long term savings plan (albeit a very tax efficient one) that is designed to provide you with savings at retirement. The value of these pension savings will be dependent upon how much money you've paid in, how long you have had your money invested and how well the fund has performed.
At retirement, provision can protect your pension from the effects of inflation or provide income in the event of your death, so it provides valuable benefits for your spouse or dependents. Benefits can normally be drawn from age 55 (57 from 2028) onwards.
If you are interested in setting up a personal pension please call us or see the section Setting up a personal pension. We can research the whole market on your behalf to find a suitable pension plan for you.
A PENSION IS A LONG TERM INVESTMENT THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATIONS.