Personal Pension Arrangements (including Stakeholder Pensions)

Personal pensions (including Stakeholder pensions) may be suitable if you are:

• employed (whether you are in a company pension scheme or not)
• self-employed
• Looking to commence a pension for a minor (e.g., grandchild), or
• if you're not working but can afford to put aside money for retirement.
• employees on a moderate income who wish to top up the money they would get from a company pension

How personal pensions / stakeholder pensions work?

With a personal pension arrangement, the individual pays either a regular amount, usually every month, or a lump sum to the pension provider who will invest it on their behalf into a fund (or series of funds) held within the pension plan. The fund(s) is usually run by financial organisations such as insurance companies, banks, building societies, and unit trusts. 

The pension fund value as at an investor's chosen retirement age will depend on the level of contributions and how well the fund(s) have performed over the plan's lifetime. The companies that run personal pensions apply charges for starting up and running your pension plan. Charges are normally deducted from your fund as an annual pecentage known as an annual management charge. Typically this charge is between 1% - 1.5%.

Contribution levels and tax relief

As from 6 April 2006 it is now possible for an investor to save as much as they like into any number and any type of pension arrangements. However, an investor only gets tax relief on contributions of up to 100 per cent of earnings each year, subject to an upper 'annual allowance' (£235,000 for the 2008/09 tax year).

Savings above the annual allowance will be subject to a tax charge. More details can be provided on contributions above the annula allowance if required.

Taking pension benefits (crystalisation events)

As from 6 April 2006 an investor can take up to 25 per cent of the value of their total pension savings from all sources as a tax-free lump sum providing they have attained age 50 (55 from 6 April 2010), up to a maximum of 25 per cent of the lifetime allowance.

There is no requirement to stop employment when commencing taking benefits.

The lifetime allowance for the tax year 2008/09 is £1.65 million, rising to £1.8 million by 2010-2011.

Upon commencing taking retirement benefits, the individual then two options to consider:

If at the time of taking retirement benefits the total value of pension funds exceeds the lifetime allowance, the member has two choices:

If the total pension fund value from all sources amounts to £16,500 or less (one per cent of the 2008/09 Lifetime Allowance) it is then possible to take the whole amount as a cash lump sum, with 25 per cent paid free of any taxation and the remaining 75% taxed at your marginal rate of tax).

This limit will gradually rise to £18,000 by the 2010-2011 tax year.

Do you need a personal pension?

The decision as to whether you need a penson will depend on:

Calculating the value of other pension arrangements

The amount of Basic State Pension (BSP) that an individual will receive at their respective state retirement age depends upon the National Insurance Contributions (NIC) record attained at state retirement date. The record is determined by what NIC have been paid (or credited with) throughout a working life. A working life is currently 44 years for a female and 49 years for a male. Basically a 90% record or more is required to achieve a full Basic State Pension.

NB...The number of years required to attain a full Basic State Pension is due to change this year following a recent Government announcement. It is likely that a lesser number of qualifying years will be required. Once the final details are anounced, then this section will be updated.

The amount of Additional State Pension you receive [previously known as SERPS (State Earnings Related Pension Scheme) but now known as State Second Pension (S2P)] is based on the level of earnings and the National Insurance Contributions paid whist an employee.

NB...It is not possible to build up entitlement to the additional State Pension whilst self-employed.

If an individual is currently of was formerly a member of an occupational pension scheme, then the employer associated with that scheme should be in a position to provide an estimate of retirement benefits as at the normal retirement age of the scheme member.

If an individual has one of the following:

then it is possible to get a current value and a projection of benefits at the chosen retirement age by contacting the respective pension scheme administrator.

What to do next

If you do not currently have a pension arrangement, and are looking for advice as to which one is right for you, or you have an arrangement that you have not reviewed recently and would like an impartial assessment, then please contact us for a free initial consultation. 

At Ashton Hoyle, we pride ourselves on our ability to collate and translate the complex details often associated with pension arrangements, making your retirement needs that much easier to plan for.