Retirement:
Personal pensions (including stakeholder pensions)

Personal and stakeholder pension schemes are individual pension arrangements not linked to employment. Personal pensions are money purchase schemes and the pension benefits you receive at retirement will depend on how much you have paid into the pension and how those funds have grown up to your retirement date.

Stakeholder pension schemes are a particular form of personal pension scheme. They have low minimum contributions (�20 per month), low cost transfers to and from other schemes and an annual administration charge capped by law. At present a stakeholder pension provider can charge no more than 1.5% of the fund value for the first 10 years of the contract. This then falls to 1%. For plans taken out prior to April 2005 the charges are restricted to 1% per annum. They have the same limits on contributions and benefits as other personal pensions.

You can contribute to a personal pension if you have relevant UK earnings for that tax year, you are resident in the UK at some point during the tax year in which the contribution(s) are paid, or you were resident in the UK both at some time during the last 5 tax years and when you became a member of the scheme. You are also eligible if either you or your spouse have earnings from overseas Crown employment subject to UK tax.

Contributions

Contributions to personal or stakeholder pension schemes can come from one or more of the following sources:

Yourself

Your employer (if they wish)

HM Revenue & Customs National Insurance Contributions Office if the scheme has been used to contract out of the additional state pension.

It is possible to contribute as much as you want into pensions. However, in order to receive tax relief on your personal payments, you can contribute up to the higher of �3,600 or 100% of earnings. There is also the further restriction of the Annual Allowance. In the 2006-2007 tax year this is �215,000, rising to �255,000 in 2010-2011. A 40% tax charge is made on total contributions, including employer contributions, above this level. The exception is in the year when you crystallise all the benefits in that scheme or arrangement within a scheme.

As well as this there is the Lifetime Allowance. In 2006-2007 this is �1.5 million, rising to �1.8 million in 2010-2011. If your total funds exceed this allowance when you crystallise them, you will be effectively taxed the Lifetime Allowance charge of 55% on the excess.

If your fund prior to A Day was approaching the level of the lifetime allowance, there are possible ways of protecting the benefits. However, certain criteria apply and the transitional protection must be registered prior to 5 April 2009.

Your pension provider will claim basic rate tax relief from HM Revenue & Customs and add it to your pension account. So if you pay �78, �100 will be credited to your pension account. The extra �22 tax relief is claimed on your behalf by your pension provider.

If you pay higher rate tax you will need to claim additional tax relief, usually on your self assessment tax return.

The pension benefits available

With personal and stakeholder pensions you can take your retirement benefits between the ages of 50 and 75. The minimum age increases to 55 with effect from 6 April 2010. The benefits paid on retirement depend on the amount of contributions that have been paid and the investment return achieved. Generally the fund built up at retirement can be taken as a lump sum of not more than 25% of the fund with the balance being used to provide an income.

Example

Mr E was self employed as a builder for his working life and had a personal pension. At retirement Mr E had a pension fund of �200,000 which gave him the following pension benefits:

A pension lump sum of 25% of the pension fund = �50,000
An annual pension bought with the remaining fund (�150,000) = �12,000

The majority of people buy an annuity with the balance of the fund. This gives them an annual pension and can include options such as an increasing pension, a dependant�s pension or a guaranteed period of payment.

Related literature:

What is an annuity?

An alternative to buying an annuity is unsecured income or alteratively secured pension. You can defer purchasing an annuity and instead draw an income from the pension fund directly. There are limits for the amount you can take each year based on limits set by the Government Actuaries Department (GAD).

Related literature:

Unsecured income

Annuities and income withdrawals are taxed like earnings from an employer under the PAYE system. This means that your personal pension provider will include your personal tax allowances and reliefs (shown in your tax code) and will deduct any tax you are due to pay before paying your annuity to you.

What happens if I leave the scheme?

If you want to stop your contributions to the scheme you have the following options:

to leave your pension fund where it is to continue to benefit from investment growth (but without further contributions) until your reach your normal retirement age, or

to transfer the value of your pension fund to another pension scheme.

It is important to take professional advice as to the best option for you. If you are no longer contributing to a pension fund with a high level of management charges, these charges can seriously erode your ultimate pension benefits particularly if the scheme has poor investment growth. If you wish to transfer your pension fund to another pension scheme your original pension fund holder may impose substantial penalties reducing the fund available to transfer.

What happens when I die?

The death benefits depend on whether you have started receiving your pension when you die and how you have chosen to take your pension:

If you die before you start receiving your pension the value of your fund will be paid to your estate or to an individual you have previously nominated to receive the fund on your death.

If you die whilst receiving your pension as an annuity the death benefits will be those selected by you when you purchased your annuity, typically a pension for your spouse or other dependants together with any amounts outstanding in respect of a guaranteed period. Otherwise any residual fund is retained by the annuity provider, unless a value protected annuity is purchased.

If you die whilst receiving your pension as unsecured income you will generally have had the option of nominating that the fund is to provide benefits for your spouse or other dependants. They will have the option of: