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Personal Pensions

Personal Pension Plans (PPP) have now been around since mid-1988. They were introduced by the UK government to enable the self-employed, and employees working for companies not operating a group pension scheme, to build up a pension fund for retirement.

PPPs are money purchase schemes with contributions receiving tax relief. An employer may contribute to an individual’s PPP. Such plans can move with individuals when they change jobs, as it is personal to them.

To be eligible to invest in a PPP and receive tax relief on personal contributions, an individual investor must be under 75 years of age, and resident in the UK (there are some exemptions for individuals who work for the UK Government or have left the UK in the last few years).

Contributions can also be made by your employer or a third party e.g. parent or spouse. The minimum contribution will vary between providers but is usually around £20 per month and they can be stopped and started at any time.

Given the many tax advantages available with regard to funding a personal pension, there are limits to the tax-relievable contributions that can be paid. Individuals are able to make contributions of up to the greater of £3,600 or 100% of their annual earnings to all of their pensions each tax year and receive tax relief on them.

There is an annual limit on the total amount of pension contributions that each person can make without incurring a tax charge (this includes employer and employee contributions). This is called the Annual Allowance. Where the total employer and/or individual contribution exceeds the Annual Allowance, a tax charge will apply.

The rate of tax will be determined by your taxable income in the tax year. It may be possible for contributions in excess of the Annual Allowance to be paid in some circumstances under the rules which allow unused Annual Allowance from the three previous tax years to be brought forward and added to the current year’s Annual Allowance.

Contributions to PPPs generate direct tax savings. Contributions are made net of basic rate tax relief, which means investors only actually contribute £80 net for every £100 of contributions paid. Higher and additional rate taxpayers likewise make contributions net of basic rate tax and can then claim additional relief via their Self-Assessment return.

Pension contributions, once made, will be invested in funds where there is no liability to tax on capital gains and where all forms of investment income are also tax-free, meaning money may grow faster here than in most other forms of investment.

The earliest age at which PPPs can be accessed is age 55. At retirement, savers have the option to take up to 25% of the fund as a tax-free cash lump sum, and the remaining funds will be taxed as income at their marginal rate(s) of income tax. There are no restrictions on people’s ability to draw down from their PPPs after age 55, as they generally allow flexible access to pension savings.

The value of someone’s pension fund is available to their beneficiaries on death and can normally be withdrawn as a lump sum or left within the pension wrapper to be drawn on to provide a regular or ad-hoc income; whatever is preferred.

For more information, click on the most suitable link:

Self-Invested Personal Pensions

Group Pensions
Small Self-Administered Schemes

Defined Benefit Transfers

Pension Annuities

Pension Drawdown

The MAP Investment Process

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