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Personal Pensions
Personal Pension Plans (PPPs) were originally designed for the
millions of employed & self-employed individuals who did
not have access to a company pension scheme, they were part
of a government push to extend pension choice & encourage
those people not in company schemes to build up a retirement
fund; one that could cater for their retirement needs more
realistically than the state. Many financial institutions offer
PPPs, though most are run by the large insurance companies
and pension companies.
Independent Financial Advisers (IFA's) can research the whole of the pensions market on your behalf to find a suitable
pension plan, it may be that a PPP meets your needs for retirement
provision. These contracts are very flexible and can allow
contributions to be made of up to 100% of your earnings (annual allowance applies). Furthermore
these plans can be set up for non-working spouses and even children
and grandchildren where up to £3600 can be invested annually.
Unlike some company schemes, all personal pensions work on a ‘money
purchase’ basis. This means that the money you save each
month or each year into your Personal Pension Plan is invested
(typically in investment funds) and is then used at retirement
to provide you with pension benefits. So in theory the more you
save the better your pension should be at retirement.
On reaching retirement, you use the money that has built up in
your personal pension to purchase pension benefits. These benefits
can be taken in the form of either income or income with a tax
free lump sum (The Pension Commencement lump sum). Or the benefits
can be transferred to another type of plan which provides flexible
pension benefits (see section on Drawdown Pension), these types of plan allow additional flexibility
in that pension benefits can be drawn whilst your pension fund
remains invested.
The value of your pension at retirement is mainly dependent upon:
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How much money you've paid in over the life of the pension plan |
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How well the money has grown i.e. the investment performance |
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The annuity rate that the provider applies to your pension
fund (if you choose to buy an annuity) |
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The level of Pension Commencement lump sum taken. (Up to
a maximum of 25% of your pension fund can be drawn as capital)
i.e. the tax free lump sum. |
So a Personal Pension Plan is really just
a long term savings plan (albeit a very tax efficient one) that
is designed to produce a fund at retirement. At retirement provision
can be made to protect your pension from the eroding effects
of inflation, protect your income in the event of your death
and make provision for your spouse or dependants. (see the Annuities
page). Benefits can currently be drawn from age 55 onwards.
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