What is a Personal Pension?


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Personal pensions may be suitable if you’re employed and not in a company pension scheme, or as an addition to a company pension. You may also wish to set up a personal pension if you are self-employed or if you are not working but can afford to put aside money for retirement.

You pay a regular amount (usually monthly or annually), or a lump sum to the pension provider who will invest it on your behalf.

The final value of your pension fund will depend on how much you have contributed and how well the fund’s investments have performed.

Contribution Levels and Tax Relief

The Annual Allowance for pension contributions is £40,000pa from 6 April 2018. This figure includes total employee, employer and third party contributions.

Tax relief is given at up to the individual’s highest marginal rate. This means that high-earning individuals can receive up to 45% tax relief on the contributions.If total contributions exceed the annual allowance the excess is added to the individual’s income and taxed accordingly.

For each pound you contribute to your scheme, the pension provider claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot.

Higher-rate taxpayers

If you’re subject to the higher tax rate of 40 per cent (up to 45% for additional rate taxpayers), you’ll still get 40% or 45% per cent tax relief for any money you put into your pension that is matched by income in the higher or additional rate tax bands. But the way that the money is given back to you is different:

  • You pay your contributions after deducting 20% tax relief and this 20 per cent tax relief is claimed back from HMRC by your pension scheme and added to your plan in the same way as for a lower rate taxpayer.
  • It’s up to you to claim back the other 20 per cent if you’re a higher rate tax payer or 25 per cent if you’re an additional rate tax paper on some or all of the contributions when you fill in your annual tax return (higher or additional rate), or by contacting your Tax Office (higher rate only). This tax relief is
  • given to you rather than being added to your pension plan..

Drawing your Personal Pension

You can take a pension commencement lump sum of up to 25% of the value of your pension savings, which is currently tax free, when you retire (up to a maximum of 25% of the lifetime allowance). The lifetime allowance for the tax year 2019/2020 tax year is £1.055 million.

You then have two main options:

  • Use the rest of the fund you have built up to buy an annuity (a regular income payable for life) from a life insurance company. This does not have to be the same company that you have your pension plan with.
  • Take a regular or ad hoc income (taxed at your normal Income Tax rate) from the remainder of your fund while it remains invested.

It should also be remembered that under the new pension flexibility rules, one off lump sums may be available to be taken from the pension plan from age 55 onwards. These lump sums will be available subject to the scheme rules allowing, and there will be taxation issues to consider if income is taken.

Scottish tax allowances and rates may differ. You should consult a financial adviser for more detailed information.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested. HM Revenue and Customs practice and the laws relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

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    This article is intended to provide a general appreciation of the topic and it is not advice.

    For more information please contact Oakwood on 01483 266666 or email enquiries@oakwoodms.co.uk and we will be happy to assist you.

    Article expiry: 05 Apr 2019

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