Personal Pension Plans Explained
Personal Pension Plans were introduced on 1 July 1988. They replaced the older style pension plans called Retirement Annuity Policies (sometimes known as s226 or s620 plans).
Simplified Pension Rules after 6 April 2006:
Who can have a personal pension plan?
Under the Pension Simplification rules you are now eligible to contribute to such a plan if you are a UK employer or a UK Relevant Individual and receive tax relief on contributions made. Even if you do not live in the UK you may still be able to pay into a UK pension plan.
What can I pay into a personal pension plan?
You are allowed to contribute premiums to as many Personal Pension plans or indeed any other pension plans as you want up to the Annual Allowance. The Annual Allowance started in 2006/07 at £200,000 pa. This means you may be able to pay huge sums into your pension without any complex calculations.
How much should I save in my personal pension plan?
This is a personal choice based on what you can afford. We have produced a number of calculators to help you decide and you should try them to see if they help you in the Interactive Zone.
What happens to my money that I have paid in?
Your pension money is invested normally in collective funds with other pension savers. You technically buy shares known as 'units' in the pension fund. Pension funds invest in a wide range of areas such as cash, property, fixed interest stock, bonds, shares, overseas shares and many more.
If the value of an asset owned by the pension fund goes up in value e.g. a Shopping centre owned by a pension property fund, then the 'unit price' value of your 'shares' or 'units' in that fund goes up.
When can I retire from a personal pension plan?
You can retire from this type of scheme after the age of 50 until April 2010 and age 55 after April 2010.
What happens to my personal pension plan at retirement?
At retirement you are allowed to receive a tax free lump sum of 25% of the fund value and the balance can then be used to purchase a retirement income. Think of it like investing money in a bank account, you cannot have the money back and you receive income on the money you invested.
There are three types of income style at the chosen retirement date; some are more risky than others: Secured Income (an annuity), Unsecured Income and for some over 75's Alternatively Secured Income.
What is the maximum pension I can receive when I retire?
There is no maximum pension you can receive. Your pension income depends upon the size of the fund that you have built up and then what income/interest rate that fund can then pay out. If your fund grows too a huge fund there will be tax penalties if it is above the Lifetime Allowance.
The Lifetime Allowance started in 2006/07 at £1.5m and increases most years so it should not affect the majority of us. If you have selected Unsecured Income you will have a choice of income levels from £0 up to 120% of the Government's Standard Annuity Level for your age and for over 75's Alternatively Secured Income you will have a choice of income levels from £0 up to 70% of the Government Standard Annuity Secured Income.
What happens if I die?
If you die before you have retired ie not taken income or tax free cash from your pension your heirs will normally receive the whole pension fund as a lump sum. 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 invested in. If you die and you are receiving benefits under Unsecured Income or Alternatively Secured Income you heirs may receive some or all or all of the fund subject to tax penalties and/or inheritance tax.
Can I have Life Insurance Cover?
Most Personal Pension plan providers can offer you Personal Pension Plan life cover. Tax relief on the premiums has now been withdrawn. It used to be that the premiums you paid for life insurance received tax relief on the premiums making them cheaper. If you die and your heirs receive Pension Life Cover pay outs plus the value of the pension fund and it exceeds the Lifetime Allowance there will be a tax charge.
What is a waiver of premium benefit?
This is offered by most pension providers as a bolt on option to your pension. This valuable benefit will pay the premiums on your policy if you are unable to work due to long term illness. Upon illness, the ongoing pension premiums are actually waived by the company but are deemed to have been paid by you. This cover is inexpensive and ensures that your pension continues uninterrupted. There is usually a deferred period before this type of benefit is paid and can be between three and six months. The pension provider will expect you to pay the premiums during the deferred period. The cost for this benefit can normally be deducted from the overall premium you pay without having to make a separate premium contribution. You should however, make an allowance for this and increase you overall contribution to ensure that your retirement benefits are not reduced.
Personal Pensions can also be used to 'contract out' of the State Second Pension Scheme (S2P).
Old Rules Before 6 April 2006:
You were eligible to contribute to such a plan if you are an employee, director or self employed person living in the United Kingdom and were not members of a Company Occupational Pension Scheme with higher salaries.
You were allowed to contribute to a Personal Pension plan if you had relevant earnings. Relevant earnings were things like taxable pay, maternity pay, statutory sick pay, taxable benefits in kind such as a company cars.
You were not allowed to take out a personal pension if you were a member of a Company Occupational Pension Scheme as your earnings may be linked to that pension scheme and therefore are NOT relevant.
NB: Some people were able to be both members of an Occupational Scheme and a Personal Pension - e.g. if you had two employments. There were also special rules for General Practitioners of Medicine or Dentistry under Statutory Concession A9 which allowed for membership and special tax relief rules. You should contact us for guidance on this.
Maximum Contributions - The maximum you were able contribute was linked to your earnings and your age.
% of Salary Allowed to contribute to the pension based upon your age at the start of the tax year - April 6th
Aged 35 or less a maximum of 17.5%
Aged 36 - 45 a maximum of 20%
Aged 46 - 50 a maximum of 25%
Aged 51 - 55 a maximum of 30%
Aged 56 - 60 a maximum of 35%
Aged 61 - 74 a maximum of 40%
For example, if your date of birth was 26/7/66. Then your age at the start of this tax year 03/04 was 36 years. Therefore, you were able contribute up to 20% of your earnings to a personal pension plan.
Cessation and Presumption of Earnings - Under rules introduced in April 2001, you were able to contribute more than the above % if earnings in previous years were higher.
Earnings Cap - The maximum salary allowed for calculations was subject to a maximum cap on earnings. For the full list of earnings caps since 1989 - visit the company schemes pages.
You received tax relief on contributions that you made to the plan. See Tax Benefits. Contributions were, and still are, paid net of basic rate tax for employees and self employed. If you were a higher rate tax payer, marginal rate relief (the 18% difference between basic rate tax - 22% and higher rate tax - 40%) was collected normally via your tax code or self assessment return.
You were able to retire between the ages of 50 and 75.
If you had a special occupation such as a sports person you were able to retire earlier say from 35. This tax free sum may be lower if you have transferred pensions in from other pension policies.
You were able to take out Life Assurance Cover as part of your personal pension plan and obtain things like tax relief on the contributions but this was restricted to certain limits on the amount you could pay in premiums.
Get help with your personal pension plan arrangements today, speak to an adviser.