Personal Pensions
A Personal Pension Plan (PPP) allows you to build up a retirement fund efficiently as contributions benefit from Income Tax relief and the fund grows without Capital Gains Tax (CGT) and tax on most income.
All personal pensions work on a ‘money purchase’ basis. The payments are invested in accordance with your investment objectives and attitude to risk and the value at retirement is dependent upon how much has been contributed, how the money has grown and charges deducted.
At retirement, a tax free lump sum of 25% of the fund may be paid with the rest providing income although there is no longer a requirement to purchase an annuity and income may be taken at whatever rate suits you. For further information regarding retirement flexibility see the ‘Retirement Choices’ section.
Tax Incentives
Pensions enjoy a number of powerful tax incentives: -
• Tax Relief On Personal Contributions - Payments attract Income Tax relief at our marginal rate of Income Tax. For example, a basic rate (20%) tax payer making a payment of £200 will have £250.00 invested (the payment of £200.00 plus the £50.00 of basic rate tax). A 40% tax payer can claim a further £50.00 in marginal Income Tax relief through their tax return giving 40% relief in total and a net cost of £150.00
•Tax Relief On Employer Contributions - Employer payments will usually enjoy full tax relief for the company. Payments do not attract NI contributions for the employer or employee.
•Growth Of Investments Free Of Capital Gains Tax (CGT) - Pension investments may be sold free of CGT.
•Tax Free Income For Pension Investments - Income on investments held by a pension is received free of tax by the manager.
•Tax Free Death Benefits - If we die prior to age 75 the full value of the account is usually payable as a tax free lump sum to whomever we choose. The choices available after age 75 are more complex, please see the section ‘Flexible Retirement…’ for more details.
There is an allowance for the total value of pension benefits that may be accrued during our lifetime and tax charges apply when benefits are drawn if the Lifetime Allowance is exceeded.
Eligibility
An annual contribution of up to £3,600 (gross) can be paid into a PPP without any employment earnings and will be entitled to basic rate tax relief reducing the cost by 20%. An employer may pay into a pension on behalf of an employee and may usually expect to receive tax relief. In addition, 'third party contributions' are permissible, for example, a working spouse can pay up to £3,600 each year into a PPP for the benefit of their non-working spouse and even for the benefit of their children.
The current rules allow us to contribute into a personal pension plan whilst simultaneously being a member of an occupational pension scheme. Although an individual can contribute to an unlimited number of pension plans during a tax year, the annual allowance, and lifetime allowances cannot be exceeded without incurring tax charges. These rules are complex and advice should be sought.
We may personally contribute the greater of £3,600 and the amount of our pensionable earnings to pension arrangements in any year although this is subject to the maximum annual allowance of £40,000. Carry forward relief allows contributions to be made in respect of earlier years when we did not make full use of allowances provided we had a qualifying pension in those earlier years. Company contributions may in some instances exceed those available as a personal contribution but advice should be sought.
If you have income over £200,000 then you may be subject to a reduced 'Tapered Annual Allowance' and if you have accessed benefits flexibly from your pension then you could be subject to a reduced 'Money Purchase Annual Allowance.'
Investment Choice
A pension may potentially be invested in a wide choice of assets ranging from cash to emerging markets and everything between these extremities. However, most older personal pensions and some modern ones restrict investment choice to a narrow range of funds managed by the provider which may be poor performers. Modern ‘multimanager’ pensions allow access to a broad range of funds from leading managers whilst enjoying the administrative ease of a single pension provider. This investment flexibility is taken to its extreme with a Self-Invested Personal Pension (SIPP) which allows the client to choose their own investments. (For further information regarding SIPP see ‘SIPPs’).
Retirement Options
With a personal pension, you are allowed to start taking your pension at any time after the age of 55 and you do not have to stop work in order to start taking your pension. You may take up to 25% of your fund at retirement as a tax-free lump sum with the remaining 75% providing income. The days of being forced to take an annuity when we stop work are long gone. Please see the sections on 'Retirement Choices', ‘Annuities’ and ‘Flexible Pensions..’ for further details.
Many clients will have already built up savings in pensions but in many instances they will have older pensions that do not offer retirement flexibility and suffer from poor investment choices. We can assist clients in reviewing and improving their existing arrangements.
The value of investments can fall as well as rise and you may get back less than the amount invested.
All personal pensions work on a ‘money purchase’ basis. The payments are invested in accordance with your investment objectives and attitude to risk and the value at retirement is dependent upon how much has been contributed, how the money has grown and charges deducted.
At retirement, a tax free lump sum of 25% of the fund may be paid with the rest providing income although there is no longer a requirement to purchase an annuity and income may be taken at whatever rate suits you. For further information regarding retirement flexibility see the ‘Retirement Choices’ section.
Tax Incentives
Pensions enjoy a number of powerful tax incentives: -
• Tax Relief On Personal Contributions - Payments attract Income Tax relief at our marginal rate of Income Tax. For example, a basic rate (20%) tax payer making a payment of £200 will have £250.00 invested (the payment of £200.00 plus the £50.00 of basic rate tax). A 40% tax payer can claim a further £50.00 in marginal Income Tax relief through their tax return giving 40% relief in total and a net cost of £150.00
•Tax Relief On Employer Contributions - Employer payments will usually enjoy full tax relief for the company. Payments do not attract NI contributions for the employer or employee.
•Growth Of Investments Free Of Capital Gains Tax (CGT) - Pension investments may be sold free of CGT.
•Tax Free Income For Pension Investments - Income on investments held by a pension is received free of tax by the manager.
•Tax Free Death Benefits - If we die prior to age 75 the full value of the account is usually payable as a tax free lump sum to whomever we choose. The choices available after age 75 are more complex, please see the section ‘Flexible Retirement…’ for more details.
There is an allowance for the total value of pension benefits that may be accrued during our lifetime and tax charges apply when benefits are drawn if the Lifetime Allowance is exceeded.
Eligibility
An annual contribution of up to £3,600 (gross) can be paid into a PPP without any employment earnings and will be entitled to basic rate tax relief reducing the cost by 20%. An employer may pay into a pension on behalf of an employee and may usually expect to receive tax relief. In addition, 'third party contributions' are permissible, for example, a working spouse can pay up to £3,600 each year into a PPP for the benefit of their non-working spouse and even for the benefit of their children.
The current rules allow us to contribute into a personal pension plan whilst simultaneously being a member of an occupational pension scheme. Although an individual can contribute to an unlimited number of pension plans during a tax year, the annual allowance, and lifetime allowances cannot be exceeded without incurring tax charges. These rules are complex and advice should be sought.
We may personally contribute the greater of £3,600 and the amount of our pensionable earnings to pension arrangements in any year although this is subject to the maximum annual allowance of £40,000. Carry forward relief allows contributions to be made in respect of earlier years when we did not make full use of allowances provided we had a qualifying pension in those earlier years. Company contributions may in some instances exceed those available as a personal contribution but advice should be sought.
If you have income over £200,000 then you may be subject to a reduced 'Tapered Annual Allowance' and if you have accessed benefits flexibly from your pension then you could be subject to a reduced 'Money Purchase Annual Allowance.'
Investment Choice
A pension may potentially be invested in a wide choice of assets ranging from cash to emerging markets and everything between these extremities. However, most older personal pensions and some modern ones restrict investment choice to a narrow range of funds managed by the provider which may be poor performers. Modern ‘multimanager’ pensions allow access to a broad range of funds from leading managers whilst enjoying the administrative ease of a single pension provider. This investment flexibility is taken to its extreme with a Self-Invested Personal Pension (SIPP) which allows the client to choose their own investments. (For further information regarding SIPP see ‘SIPPs’).
Retirement Options
With a personal pension, you are allowed to start taking your pension at any time after the age of 55 and you do not have to stop work in order to start taking your pension. You may take up to 25% of your fund at retirement as a tax-free lump sum with the remaining 75% providing income. The days of being forced to take an annuity when we stop work are long gone. Please see the sections on 'Retirement Choices', ‘Annuities’ and ‘Flexible Pensions..’ for further details.
Many clients will have already built up savings in pensions but in many instances they will have older pensions that do not offer retirement flexibility and suffer from poor investment choices. We can assist clients in reviewing and improving their existing arrangements.
The value of investments can fall as well as rise and you may get back less than the amount invested.