Personal (Private) Pensions

A personal pension (also known as a private pension) is a type of money purchase pension that you take out yourself, which means you can continue to contribute to it if you move jobs. It is an ideal way to provide you with a regular income in your retirement if you are self-employed or don't have access to an occupational pension scheme. With a personal pension, you pay a lump sum or a regular amount (generally every month) to the pension provider who claims tax relief at the basic rate and adds it to your fund before investing it on your behalf. When you retire, you can take a tax-free lump sum from your fund, and use the rest to buy an annuity, which will give a regular taxable income for life.

A personal pension may be bought from high street banks, insurance companies, investment organisations and some retailers (i.e. supermarkets and high street shops).

How Much Will You Get?

The final value of your pension at retirement will depend on several factors including:

How much you've contributed to the fund.
How well your investments have performed.
What charges have been made by your pension provider.
The type of annuity you choose.
Annuity rates at the time you retire.

Eligibility

To purchase a personal pension, you must be:

Under 75 years of age.
A United Kingdom resident or a Crown servant or the spouse or registered civil partner of a Crown servant.

You are permitted to have a personal pension as well as belonging to an occupational pension scheme. Other people can also pay into a personal pension on your behalf, such as family members or employers.

Personal Pension Conditions

When setting up a personal pension, you may be charged up to 5%.
Annual management charges (AMCs) to cover administration and management will cost around 0.5-1.5% a year; however, some providers may offer tiered AMCs, which fall as your fund grows.
You can invest up to 100% of your earnings (subject to an annual limit of £255,000 in the tax year 2010-11) - if you hold more than one pension, then this limit applies to the total amount of contributions paid across all schemes.

Benefits of a Personal Pension

There are a number of advantages to contributing to a personal pension scheme:

You don't need to be working to save in a personal pension scheme.
You can choose to take a tax-free lump sum of up to 25% of your total pension when you retire.
You get tax relief on your contributions up to HM Revenue & Customs limits.
You may be able to choose the funds you invest in.
Other people can pay into a personal pension on your behalf.

Investment Choices

Personal pensions can be invested in a very wide range of with profit and unit-linked pension funds, and many personal pension providers also offer externally managed funds. Personal pension plans often have a fund choice that covers hundreds of funds covering the following types:

UK and overseas equity funds
index tracker funds
risk-based managed funds, e.g. cautious, balanced, aggresive
gilt and fixed interest (bond) funds
cash funds
property funds
with profits
green/ethical funds
emerging market funds

You will need to consider the target income you wish to achieve for your retirement and your attitude to risk before selecting your investment funds. Although you can normally switch between the investment funds of your provider at any time, there may be a charge for doing so.

Is a Personal Pension Right For You?

A personal pension might be a good choice if:

You're not working but can afford to pay into a pension.
You're self-employed.
You're employed but your employer doesn't offer an occupational pension scheme.

However, it may not be right if:

Your employer offers access to an occupational pension scheme; if so, you should seriously consider joining it.
Your employer offer access to an occupational stakeholder pension scheme, which it contributes to.
You want to top up your occupational pension scheme (however, paying additional voluntary contributions (AVCs) may be a better way of doing this).
You might need to vary the payment amounts, or stop and start payments; in this case, a stakeholder pension may be a better choice.

What Happens If You Change Jobs?

If you change jobs, you can continue paying into your personal pension. However, it's worth checking to see if your new employer offers an occupational pension scheme, as this may offer you a better deal, especially if your employer contributes. There may be a charge for transfers in and out of your plan and for switching funds, but not for reducing or increasing your contribution level.