Personal Pension Schemes
Many workers have access to so-called occupational pension schemes, in which the employer makes contributions in addition to those being taken from the employee’s wage packet. There are, however, several options available to those without an occupational pension scheme, or who wish to supplement it with a second pension.
InvestmentEssentially, a personal pension involves the pension holder placing a sum of money in the hands of a financial institution, which will then invest that money on the holder’s behalf. In most cases, this sum takes the form of regular instalments, but it can also consist entirely of a single payment made at the time that the pension is opened.
In either circumstance, your chosen provider will then be given the responsibility for investing this money in a suitable fashion. There are increasingly stringent guidelines to which providers must adhere in order to ensure the maximum safety for your money.
Tax ReliefThere are several forms of Tax Relief available on personal pensions, and these are, broadly speaking, the same as those available for other pensions types. The most important of these is the relief offered on the contributions themselves. You are entitled to tax relief on contributions up to the equivalent of 100% of your earnings. This is subject, however, to a maximum limit of £50,000 in the tax year 2013-2014. This limit will be reduced to 40% for the tax year 2014-2015. Any contributions made above this limit will have taxes levied on them.
If you bay the basic rate of tax, 20%, then your pension provider is responsible for claiming tax back on your contributions. This extra 20% will be automatically added to your contributions. If, however, you are a higher rate taxpayer, while you will still be able to claim tax relief on all 40%, you will have to do so in a different way.
In these cases, while your provider will reclaim the 20% basic rate, you will have to lodge a repayment claim for the remaining 20% yourself, either on your tax return or by writing to your Tax Office.
Lump-Sum OptionAnother of the most widely cited forms of tax relief available on pension schemes relates to the ‘lump sum’ option offered by many providers. It is likely that you will be able to withdraw up to 25% of your total pension fund as a single payment on maturity of the fund. With some schemes this must be used to buy an annuity, but others allow the pension holder to choose how to spend the money.
In either case, this 25% will also be tax-free. This is in addition to the capital gains tax exemption granted to pension funds, meaning that any profit made as a result of a rise in the value of the assets in your fund will not incur any tax.
It should be noted that a personal pension plan is not necessarily the best choice for everyone. If you don’t have access to an occupational pension scheme, it is also worth investigating Stakeholder Pensions, which are looked at in another article in this section.