What is Personal Pension?
Personal Pension
A Personal Pension is a flexible, tax-efficient way of saving for your long-term future. You can contribute money into the pension from 18 until you’re 75 and start enjoying your savings. A Personal Pension, which is often referred to as a private pension, is a savings plan you may put in place to start setting aside money for your future. The amount you have invested and the performance of your investments will determine its value when you retire.
Personal pensions may be suitable if you’re employed and not in a workplace pension scheme, or as an addition to a workplace pension. You may also wish to set up a personal pension if you are self-employed. If you have no income tax relief is only payable on contributions up to £2,880 per annum.
You can make a regular or lump sum amount either monthly or annually into your pension. Once inside the pension wrapper your contributions can then be placed into a variety of investments. Funds are typically managed by financial institution, such as platforms, unit trust companies or insurance companies. The final value of your pension fund will depend on how much you have contributed and how well the fund’s investments have performed.
Pension contribution limit
The pension contribution limit is currently 100% of your income, with a cap of £60,000 per annum. If you contribute more than £60,000 in a year into your pension, you won’t receive tax relief on any amount over the contribution limit. Although few people are affected by the legislation, it’s still important to understand it, because if you exceed it you will face a tax charge.
For 2023/24 the tax free annual limit is 100% of your salary or £60,000 (whichever is lower). This includes both contributions paid by you and contributions paid by your employer.
Tax relief
The tax relief you can receive depends on your income tax rate band. This means that if you are a basic rate tax payer, you will receive an extra 20% on your eligible contributions.
If you are a higher rate taxpayer, you can claim further tax relief (at your higher rate) from HMRC. This is usually claim through your self-assessment tax return. The rates are slightly different in Scotland.
However, this assumes that not only are you eligible for the additional tax relief, but that it is reclaimed via your annual tax return. Your pension will only benefit from the additional tax relief, if it is reinvested into your pension.
If you earn less than £3,600, or you don’t earn anything at all, you’re still allowed to receive tax relief on pension contributions up to £3,600 gross. That means you can save up to £2,880 net plus a 25% tax top up.
Recently, a tapered allowance has been introduced for high earners. It mainly affects people who earn over £200,000. Please arrange a free initial meeting to discuss pension tax relief according to your income.
Drawing your personal pension
You can start taking an income or lump sums (or both) from the age of 55, this is set to change to 57 on 6 April 2028. Anyone born on or after 6 April 1973 may see their minimum pension age move to 57. This means you might not be able to take some or all of your pension benefits until you reach that age, which could be up to two years later than expected.
You can take a pension commencement lump sum of up to 25% of the value of your pension savings, which is completely Tax free (upto a maximum of £268,275)
You then have these options You can keep your pension pot where it is and delay taking money from your pension pot to allow you to consider your options. Reaching age 55 (57 from 2028) or the age you agreed with your pension provider to retire is not a deadline to act. Delaying taking your money may give your pension pot a chance to grow, but it could go down in value too.
- You can take the whole amount as a single lump sum. A quarter (25%) of your pension pot can usually be taken tax-free – the rest will be taxed. You will need to plan how you will provide an income for the rest of your retirement.
- You can leave your money in your pension pot and take lump sums from it as and when you need, until your money runs out.
- You can leave your money in your pension and take an income from it. Any money left in your pension remains invested, which may give it a chance to grow, but it could go down in value too. A quarter (25%) of your pension pot can usually be taken tax-free and any other withdrawals will be taxable, whether you take them as a regular income or as lump sums. You may need to move your pension to a different provider to do this.
- A lifelong, regular income (also known as an annuity) provides you with a guarantee that the income will last as long as you live. A quarter (25%) of your pension pot can usually be taken tax-free and any other payments will be taxed.
- You can choose different options at different times or for different parts of your pension pot, depending on what suits your needs.
The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.
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