Personal Pension Plans Explained

Published / Last Updated on 19/05/2023

Personal Pension Plans were introduced on 1 July 1988.

Who can have a personal pension plan? 

  • A UK employer paying contributions for an employee.
  • A UK Relevant Individual and receive tax relief on contributions made.
  • A UK resident non-taxpayer, pensioner, low earner and even children but the maximum contribution is £2,880 pa net which is made up to £3,600 pa with tax relief at basic rate tax added.
  • Overseas Resident:  usually will not be able to open a UK PPP but if you already have one when you leave the UK you can usually pay in for up to 5 years.

What can I pay into a personal pension plan?

The current maximum you can pay into a pension for tax year 06/04/2023 to 05/04/2024 is the lower of:

  • Your yearly earnings or £60,000.00.
  • You may also be able to pay more in using Carry Forward (of previous 3 years unused tax relief allowances).

What happens to my money that I have paid in? 

Pension funds invest in a wide range of areas such as cash, property, fixed interest stock, bonds, shares, overseas shares and many more. 

When can I retire from a personal pension plan? 

You can retire from age 55 but this increases to age 57 in April 2028.

What happens to my personal pension plan at retirement?

At retirement you are allowed to receive a tax free (if in UK) lump sum of 25% of the fund value and the remaining 75% is used for retirement income. 

There are two types of income style at the chosen retirement date; some are more risky than others: 

  • Lower Risk - Secured Income (an annuity)  and Medium and Higher Risk - Flexible Drawdown.

What happens if I die? 

If you die before you have retired i.e., not taken income or tax-free cash from your pension your heirs will normally receive the whole pension fund as a lump sum tax free. 

If you die and you are already receiving benefits, cash or pension or both, if it is:

  • Secured Income (Annuity) your heirs may or may not be able to receive a balance of the fund paid depending upon the type of annuity you invest in.
  • Unsecured Income (Flexible Drawdown), your heirs receive some or all or all of the fund. 
    • If you die below age 75, they will inherit the complete pension fund tax free (in UK). 
    • If you die after age 75, they will inherit the whole pension fund but will pay income taxes at their own normal rates when they drawdown an income.

Can I have PPP Life Insurance Cover? No

Waiver of premium benefit is offered by some pension providers as a bolt on option to your personal pension but usually you must select it when you start the pension to  pay the premiums on your pension policy if you are unable to work due to long term illness.

More on Personal Pension Plans: PPP

Heard of Self Invested Personal Pensions (SIPPs), where you/your financial adviser chooses where to invest rather than a fund manager?

See:  SIPP

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