Personal
Personal Pension Plans
A personal pension plan helps you save money for retirement and is available to any United Kingdom resident who is under 75 years of age. You, in conjunction with your adviser, choose the pension provider and make the arrangements for paying the contributions to the plan.
You can start a personal pension even if you have a workplace pension or if you’re self-employed and don’t have a workplace pension. You don’t have to be working to take out a Personal Pension Plan and you can also provide a Personal Pension Plan for your spouse/partner or your child/children.
When you contribute to a Personal Pension plan, your money is invested by the pension provider (usually an insurance company) to build up a fund/pension pot over a number of years.
Tax relief
If you’re a basic rate taxpayer, your pension provider will claim back Income Tax at the basic 20 per cent rate on your behalf on the contributions you make and add it to your pension pot. Higher rate taxpayers claim the additional rebate through their tax returns.
Contribution limits
The total amount (the ‘annual allowance’) you or your employer can contribute to a defined contribution personal pension scheme, or schemes, is limited to £40,000* per annum. If you contribute more than that you will pay a tax charge unless you have the availability to use carry forward where you can use any unused allowances for the previous four years. The maximum you can contribute to your personal pension or pensions in your lifetime — the ‘lifetime allowance’ — is £1,073,1000*.
For the tax year 2018-19 onwards individuals who flexibly access a money purchase arrangement in certain circumstances will trigger the money purchase annual allowance rules.
The following limits apply from 6 April 2016 onwards, whether the individual triggered the money purchase annual allowance rules on or after 6 April 2016 or at any time during the period starting 6 April 2015 and ending on 5 April 2016.
The money purchase annual allowance for tax year 2020-21 onwards is £4,000.
Tapering of the annual allowance
The annual allowance is reduced by £1 for every £2 of an adjusted income above £240,000, subject to a minimum reduced annual allowance of £4000.
Where the reduction would otherwise take an individual’s tapered annual allowance below £4000 for the tax year, their reduced annual allowance for that year is set at £4000.
Tax-free cash
Most schemes allow you to withdraw 25% of your fund tax-free from age 55 onwards. Subsequent withdrawals are subject to income tax.
The size of your pension pot will depend on:
- the amount of money you paid into the plan
- the performance of the plan’s investments
- charges payable under the plan
Taking your pension
Although most personal pension schemes specify an age when you can start withdrawing benefits from your personal pension (usually between 60 and 65) you are allowed to do that from age 55 if you wish. You don’t have to stop work to draw benefits from your plan.
Death Benefits
If you die before the age of 75 and haven’t purchased an annuity, your beneficiaries can inherit the entire pension fund as a lump sum or draw an income from it completely free of tax. If you’re over 75 years of age when you die, there will be tax to pay on any withdrawals made by the recipient of your fund. This can be managed by accessing the benefits on a flexible basis to efficiently use the recipients personal tax allowances.
*Tax year 2021/2022
A PENSION IS A LONG TERM INVESTMENT, THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM TAXATION, ARE SUBJECT TO CHANGE.
