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Personal pensions
This information applies to England, Wales, Scotland and Northern Ireland
About personal pensions
A personal pension is one way you might choose to save for your retirement.
Personal pensions can also be called money purchase pensions or defined contributions schemes. They're particularly useful where your employer doesn't offer you access to a workplace pension scheme, you're self employed or not working.
This page tells you:
- how personal pensions and stakeholder pensions work and how they are different
- who a personal stakeholder pension is suitable for
- basic information about choosing how to invest your pension fund
- where you can get more information about pensions.
What is a personal pension
A personal pension is a way of saving for your retirement. It works like this:
- you make regular payments (contributions) into your pension fund. This is the pot of money you build up while working and use when you retire, to give you an income
- the fund is invested, for example in stocks and shares, with the aim of increasing the amount in it over the years before you retire
- when you retire, you use the money in the fund to buy an annuity which gives you an income for the rest of your life. This is your pension.
You can't tell in advance exactly how much pension you'll get because it depends on how much you pay in, how well your investments do and what charges you have to pay. If your investments do badly, you could end up with less money than you expect.
The Money Advice Service website has a Pension calculator which helps you work out the amount of pension you could get based on your regular contributions. Go to: www.moneyadviceservice.org.uk.
For more information about buying an annuity, see Choosing an annuity.
Stakeholder pensions
Stakeholder pensions work like personal pensions but have to meet the following conditions:
- the pension provider can't charge more than 1% of the value of your fund each year for administering the pension
- you can't be asked to make a minimum contribution of more than £20, although you can make more than this, if you want to
- it's up to you how and when you make payments into your fund. You can't be forced to pay in regularly
- there are no penalties for missing or stopping payments
- you can switch your fund to another stakeholder scheme or other pension at any time without penalty.
If you need greater flexibility in when and how much you pay into your pension, a stakeholder pension may be a good option for you.
You should compare your options before making your choice and take financial advice if you can.
If you're thinking about taking out a stakeholder pension, you could try using the stakeholder pension decision tree on the Money Advice Service website. This is an online tool which helps you work out if a stakeholder pension could be a good choice for you. Go to: www.moneyadviceservice.org.uk.
Self-invested personal pensions (SIPPs)
With standard personal pension and stakeholder pension schemes your investments are managed for you within the fund you have chosen. SIPPs are a form of personal pension scheme that give you the freedom to choose and manage your own investments. SIPPs providers include insurance companies, pensions consultants and fund managers.
You could also employ and pay for an approved manager to make the decisions for you. The Association of Member-directed Pension Schemes (AMPS) is the trade body for SIPPs providers and mangers. You can find a list of approved SIPPs managers by visiting their website. Go to: www.ampsonline.co.uk.
You should only think about SIPPs if you're an experienced investor or have large amounts of money to invest. This is because SIPPs tend to have higher charges than other personal and stakeholder pensions because of the risks involved in self management.
What do personal pensions provide
A personal pension scheme will provide one or more of the following benefits:
- a pension during retirement, which can start from age 55
- a tax-free lump sum on retirement
- a pension payable to your widow, widower, civil partner or someone else who depends on you
- a tax-free lump sum, payable if you die before retirement, to your widow, widower, civil partner or someone else who depends on you.
Who can have a personal pension
You can take out a personal or stakeholder pension whether you are employed or self-employed or not working at all, as long as you can afford to put money away for a pension. You can also take out a stakeholder pension on behalf of a child.
You can take out a personal pension even if you're already paying into an occupational pension scheme. You might want to do this if you want more money for your retirement or if you start a pension later in your working life and so have less time to save.
Tax relief on your pension
There's no limit to how much you can save in your pension schemes. You can save a combination of your salary and other income you earn.
If you're a UK taxpayer aged under 75, you can put as much of your yearly earnings as you want into a pension scheme up to a limit of £50,000 (in the tax year 2011/12) and you won’t have to pay tax on any of the contributions. You can still put more money into your pension scheme above this limit but it will be taxed at 40%.
If you're not earning, you can get tax relief on a limited amount of the contributions you pay in.
If you're a higher rate tax payer you can claim tax relief of 40% on your pension contributions.
You usually make pension contributions after you’ve already paid tax, so your pension provider has to claim the tax relief you are owed back from the government, and then pay it into your pension fund.
However, your pension provider is only allowed to claim tax relief of 20% from the government. If you are a higher rate taxpayer, you'll have to claim the other 20% yourself, either through your tax return or by contacting your local tax office.
For more information about tax relief, see Tax reliefs.
Investing your pension fund
When you take out a personal pension, it will be up to you to decide how you want your money to be invested. This also applies to a stakeholder pension. An investment is where you put money into something to make a profit. Your choices will be set out in your pension scheme documents. What you decide will depend largely on:
- how much you want the fund to increase and
- how much risk you are willing to take.
You should get help from an independent financial adviser before deciding how to invest your money, to make sure you've thought about all your options.
For more information about choosing a financial adviser, see Getting financial advice.
Types of investment
You will typically be offered a mix of the following broad types of investment to invest your pension contributions in:
- cash. This means money saved on deposit, for example in the bank or building society
- bonds. These are loans to the government or to a private company which generally pay a rate of interest until the loan is repaid
- property. This is money invested in land or buildings
- equities. This means shares in private companies.
You will need to do some research to find out which type of investment will allow your savings to grow enough to buy the pension you want. You will also need to decide how you feel about investment risk.
Before deciding how to invest your contributions, you should always take advice from an independent financial adviser specialising in pensions.
For more information about choosing a financial adviser, see Getting financial advice.
The Pensions Regulator governs work-based pension schemes. It has produced a leaflet, called Making pension fund choices, which explains more about choosing how to invest your pension fund. Go to: www.thepensionsregulator.gov.uk.
What's the risk
Different types of investment carry different levels of risk. For example, investing in shares might be a higher risk because their value can go down as well as up. Cash and bonds are seen as lower risk investments because there is more guarantee you will not lose your money.
It's very important to understand what level of risk different types of investment have and how your choice of investment will affect your final pension. If you make the wrong choice, you could end up with less pension than you expected.
Over the long-term, the less risky investments tend to produce less money. This means your money might generally be safer but your pension pot is likely to be smaller.
If you start your pension pot early in life you can generally afford to take more of a risk because you've got time to recover any loss.
As you get closer to retirement, you may be advised to lower the risk so that short-term changes in the stock market won't have too much effect on your final pension amount.
You should always take advice from an independent financial adviser who can explain different levels of risk and help you decide what's best for you.
For more information about choosing a financial adviser, see Getting financial advice.
Further help and information
On Adviceguide
For more information about choosing a personal pension and to find out about other types of pensions, see Pensions.
You may also find the following Adviceguide information helpful:
The Money Advice Service
The Money Advice Service is a free, independent service. Their website has lots of useful information about pensions including comparison tables for choosing a personal pension provider and a pension calculator for working out how much pension you'll need. There's also a range of leaflets to help answer your pensions and retirement questions.
Go to: www.moneyadviceservice.org.uk.
The Pensions Advisory Service (TPAS)
TPAS is an independent organisation that provides free information, advice and guidance about all types of pensions including state retirement pension, workplace, personal and stakeholder schemes.
TPAS doesn’t provide financial or investment advice or recommend products.
Helpline: 0845 601 2923 local rate
Website: www.pensionsadvisoryservice.org.uk
Directgov (in England, Wales and Scotland)
Directgov is the government website. It has lots of information about the state retirement pension and other types of pensions, saving for your retirement and the changes to pensions that are happening from 2010. Go to: www.direct.gov.uk.
nidirect (in Northern Ireland)
nidirect is the official government website for Northern Ireland citizens. It has lots of information about the state retirement pension and other types of pensions, saving for your retirement and the changes to pensions that are happening from 2010.
Go to: www.nidirect.gov.uk.
