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Glossary
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal pensions
A Guide to Personal Pensions

Personal pensions (sometimes called private pensions or self-employed pensions) are pension schemes which people take out privately, not connected to state pension or company pension. Personal or private pensions are suitable for those:

  • who are employed but not paying into a company pension scheme

  • whose employers do not run a company pension scheme

  • who want the benefit of an additional pension on top of a company pension

  • who are self-employed

  • who are not working but can afford to save money for retirement

Whether you need personal pensions or self-employed pensions will depend on:

  • how much you can afford to put aside

  • how much you will receive from other pensions, such as state and company schemes, when they become due

Before you decide if taking out personal pensions or private pensions necessary, you should work out the total value of your other pension schemes such as your basic State Pension, your additional State pension, and your company pension.

How do personal pensions work?  

  • Personal pensions are normally managed by financial organisations such as building societies, banks, insurance companies, and unit trusts.

  • When you take out private pensions, you are normally required to pay a regular amount, usually every month, or a lump sum to the pension provider who will invest it on your behalf.

  • You can save as much as you like into any number and type of personal pensions.

  • Up to the age of 75, you enjoy tax relief on contributions of up to 100 per cent of your earnings yearly. This is subject to an upper annual allowance. Any savings made on private pensions or self-employed pensions above the annual allowance are taxable.

  • The ultimate worth of your pension fund is reliant on the level of your contributions and how successfully the fund's investments have performed.

  • Your chosen private pension provider will charge you for arranging and managing your pension. Charges are usually deducted directly from your fund.

What happens when it is time to draw from your personal pensions?

When you retire, you are allowed to take up to 25% of the value of your total private pensions savings from all sources as a tax-free lump sum.

Once you have secured this portion of your private pensions, you can choose to:

  • use the remainder of the private pensions fund to purchase an annuity to provide you with a regular income for life.

  • take an income, which will be taxed at your normal income tax rate, from the remainder of your fund while it continues to be invested as an unsecured or secured pension up to the age of 75.

If your total private pensions savings exceed the lifetime allowance you can:

  • withdraw the excess, which will be taxed at 55%, as a taxed lump sum

  • withdraw the excess as income, which will be taxed at 25%. Income taken from self-employed pensions will be taxed at your usual income tax rate.

Alternatives to personal pensions

If you wish, you could consider taking out a Stakeholder Pension as a means of topping up a company pension. A stakeholder pension is a type of low-charge pension where you are permitted to save as little as £20 per month. You can buy a stakeholder pension from a commercial financial services company, such as a bank, insurance company, or building society. Stakeholder pensions are regulated by the government to ensure that they offer good value.

You could also consider taking up the opportunity offered by some employers to top up through Additional Voluntary Contributions or AVC which may be more cost-effective. When considering private pensions, self-employed pensions, or personal pensions, it's a good idea to explore all your options before choosing the right one.

Learn more about pensions

 

 
 
 
 
 
 
 
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