A personal pension is a pension that is arranged by yourself and are sometimes also known as a defined contribution pension. You have the freedom to choose any provider, where you’ll have an individual contract in place with them.
The best place to get a personal pension is from an Independent Financial Adviser (IFA). Being independent means that an IFA can find the best deal suited to your personal circumstances and has the ability to look at all pensions on offer from a range of providers.
If you fancy choosing a pension yourself, you can Google "Top 10 personal pension plans" (for example) and access some great pension comparison sites online. But what does it all mean? And how applicable is it to your personal finances?
Let your IFA do the leg-work as well as make things clearer for you. Brief your IFA to review the personal pension market, round up some sensible prospects and talk you through your options. An IFA will be able to look at your unique financial situation and recommend a pension that best suits your personal requirements.
Personal pensions are a form of investment designed for retirement planning. Like all investments, personal pensions offer benefits as well as disadvantages if you compare them with other investments.
Personal pensions offer tax advantages as well as compound interest and professional involvement to a level you are comfortable with. On the downside, as with all pensions, personal pensions lock your money away until the age of 55. As with all investments there is the risk that you will eventually receive less than you hoped for. Personal pensions offer positive and negative features.
Whether a personal pension is worth it or not depends on your own unique financial situation. There are many other options for retirement planning investment, including the old favourite of property investment.
Workplace pensions, on the other hand, are usually always "worth it." That’s because with a workplace pension your employer is legally obliged to contribute to your pension pot, on which you will also receive tax-relief. Workplace pensions are now compulsory in the UK under the government’s Automatic Enrolment scheme.
Workplace pensions, on the other hand, are usually always "worth it." That’s because with a workplace pension both your employer and the government are obliged to contribute to your pension pot as well as yourself. Workplace pensions are now compulsory in the UK under the government’s Automatic Enrolment scheme.
You can take your personal pension as a lump sum provided that you are aged 55 years or over. Or you can take it in smaller chunks over time.
"Whether you have a defined benefit or defined contribution pension scheme, you can normally start taking money from the age of 55." (pensionadvisoryservice.org.uk)
You can take the whole lot as cash, take it in smaller chunks, or re-invest it in other compatible financial products.
Be aware that rules exist about what you can and cannot do, and taxation applies. In the area of pension taxation, the guidance of an IFA really counts, as there are a variety of positive steps that can be taken to safeguard what is often a lifetime’s worth of investment.
You can take 25% of the value free of tax with the remaining 75% being taxed at the relevant income tax rate of 0%, 20%, 40% or 45%, based on your total taxable income in the tax year.
Below is a table taken direct from the government pension advisory service website which shows how all pension pots are taxed at the point of conversion/cashing in:
|Pension option||What’s tax free||What’s taxable|
|Leave your pot untouched||Your whole pot while it stays untouched||Nothing while your pot stays untouched|
|Guaranteed income (annuity)||25% of your pot before you buy an annuity||Income from the annuity|
|Adjustable income||25% of your pot before you invest in an adjustable income||Income you get from your investment|
|Take cash in chunks||25% of each amount you take out||75% of each amount you take out|
|Take your whole pot in one go||25% of your whole pot||75% of your whole pot|
|Mix your options||Depends on the options you mix||Depends on the options you mix|
This is a very good question. That’s because pension pots often contain a good proportion of somebody’s wealth – and this can be hugely reduced after death if tax issues are not handled correctly. What happens to your pension when you die is an important family issue, so it is always worth seeking professional financial advice as part of your legacy planning.
In terms of taxation, the good news is that personal pension pots can be passed on in the UK with no Inheritance Tax to pay. This includes SIPPs and Stakeholder Pension Schemes (SHPs), and applies to all Direct Contribution (DC) pensions.
If you die over the age of 75, any withdrawals that your beneficiaries make on the pension pot you passed on will be subject to taxation at their own normal rate of 0%, 20%, 40% or 45%. Taxation on pensions can be complicated and the choices are complex, it is often beneficial to seek professional advice.
Tax rates, allowances and reliefs are as at May 2019 and are subject to change in the future. The benefit of any allowances and reliefs depends upon your personal situation and may also change over time.