Personal pensions are a type of defined contribution pension scheme. They are individual contracts between you and the pension provider and are set up by you, the member. The pension provider is often an insurance company, although there are also a number of independent providers.
You can have a personal pension if you’re employed, self-employed or not working. If you’re employed, your employer can also contribute to your personal pension.
Other people are also able to contribute, and you can contribute to other people’s personal pensions. For example, you could contribute to your spouse’s or partner’s personal pension, or even to a child’s personal pension to allow them to start building up retirement benefits from an early age.
There are no restrictions on the number of different pension schemes that you can belong to, although there are limits on the total amounts that can be contributed across all schemes each year, if you’re to receive tax relief on contributions.
This means you can have a personal pension to provide additional retirement benefits, even if you’re a member of a workplace pension scheme. Most personal pensions are flexible and portable. If you change jobs, or stop working, you can normally continue contributing to a scheme.
Contributions and Investments
All contributions that are made to your personal pension are invested and there is normally a wide range of funds available to you.
Different funds have different risk profiles. While higher risk funds can potentially provide higher returns over the longer term, these returns can be unpredictable. Whichever fund or funds you invest money in, the value of these funds can go down as well as up.
Drawing pension benefits
Personal pensions are money purchase schemes. The value of your retirement benefits are determined by the amount of contributions that have been made, the period that each contribution has been invested, investment growth over this period and the level of charges.
Under current legislation, you can commence drawing retirement benefits from the age of 55 (or possibly earlier, if you’re in ill-health); You don’t have to stop work to draw benefits. Up to 25% of your accumulated fund can be withdrawn as a tax-free cash lump sum with the balance used to provide an income.
When taking benefits from a defined contribution pension schemes, you may be able to draw down amounts up to the whole value of your remaining pension fund as taxable lump sums, as well as having the option to receive a regular income.
When you decide to receive a regular income, the amount of income you receive depends on the type of pension that you’ve selected. Options include:
- Choosing a level income or one that increases once in payment;
- Providing a continuing income for your dependants on your death; and
- Guaranteeing payment of your income for a set number of years.
There are different ways that this income in retirement can be provided. These include taking out an annuity and income drawdown, or a combination of both.
Pensions in payment are taxed as income, but you do not pay National Insurance contributions on pension income.