Tax treatment varies according to individual circumstance and is subject to change.

The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.

A personal pension is simply a way of saving money for your future retirement.

Pensions have one very important advantage - they're incentivised by the taxman. In fact, the taxman is very generous when it comes to personal pensions, adding to your pension every time you pay money in.

Every £80 you pay in is topped up to £100, giving your savings an immediate boost of 25%. And higher rate taxpayers can get even more.

Plus, on top of the tax relief you receive each time you pay into your pension, the money you've saved grows virtually tax free over the years*.

 

Pensions Explained

A pension provides income to live on in retirement. There are state benefit schemes offering limited financial support for your old age, and a number of other private schemes enabling you to build a larger fund for the future. To avoid a paltry income in retirement it is in everybody's best interest to save more for it.

State benefits are included in the State 2nd Pension, replacing the basic state pension (SERPS) from 2002. There are a number of other types of pension scheme including occupational pensions, personal pensions and stakeholder pensions.

Where the pension is an occupational scheme. it may be possible to make additional contributions in the form of AVCs, FSAVCs or stakeholder pension contributions.

Self invested personal pension schemes (SIPPs) allow investments from a wide range of sources including Commercial Property, shares and unit trusts.

Please remember future governments may increase or decrease the amount of tax relief you get.

*There's a tax on dividend income from UK shares which pension funds aren't able to reclaim. Please note, this information is based on our current understanding of taxation law and HM Revenue & Customs practice in the UK. The amount of tax relief you receive depends on your personal circumstances and may change.

Types of Pensions

There are many different types of pension available - the most common are the basic state pension, full state pension, state second pension. The amount available for each pension varies. For further information on the amounts available, please contact your local Financial Adviser.

 Occupational pension schemes
Employers can set up an occupational pension scheme for their employees. An occupational pension scheme can be offered to both public and private employees.

 Public sector occupational pension scheme
Public sector schemes typically offer pension accrual of 1/80th of final remuneration for each year of service up to a maximum of 40 years plus a tax free lump sum of up to 1.5 x final remuneration.

 Private sector occupational pension scheme
Private sector schemes can be either final salary schemes known as defined benefit schemes or money purchase schemes known as defined contribution schemes.

 Executive pension scheme
Many directors of small to medium sized family businesses make use of an executive pension scheme. Executive pension plans are similar to occupational pension schemes in that they are subject to occupational pension scheme rules.

Types of occupational pension scheme

Final salary schemes
Final salary occupational pensions schemes offer a guaranteed pension amount, usually based on salary and time served with an employer.

Typically accrual rates of 1/80th or 1/60th of pensionable salary for each year of pensionable service are found.

E.g. Fred Smith retires on a salary of £10,000pa after 20 years in a 1/60ths scheme. His pension is 20/60 x £10,000 = £3,333.

 

Money purchase scheme
With a Money Purchase occupational pension plan, the pension contributions are invested and the final pension is based on the investment performance of the fund. There is no guarantee.

Individual Contributions
Individuals can contribute as much as they want although there are limits on the amount of contributions that will receive the full benefits of tax relief.

Any contribution that is not paid by the employer is classed as a member contribution even if a third party has made the contribution. Tax relief is given according to the member's situation; i.e. make sure that tax relief at source applies if the member is a non- or starting rate taxpayer. An example of this is a grandparent paying a pension contribution for his/her grandchild.

Employer Contributions
Just like individual contributions, employer contributions are also unlimited. Full tax relief will be available without limit subject to the local inspector of taxes. However, there will be a tax charge on the member where total contributions are above the annual allowance.

Eligibility
Any member of a registered occupational pension scheme can make contributions to it. However, to be eligible to gain tax relief, the contribution must be made by an active scheme member who is also a relevant UK individual. To qualify as a relevant UK individual, the scheme member must meet one of the following criteria:

 

Pension Allowances

Annual Pension Allowance
Since A-Day, annual pension contributions have a new limit attracting full tax relief. Any contribution over the annual allowance will be subject to a tax charge.

Lifetime Pension Allowance
As well as an annual allowance charge, there is a possible lifetime allowance charge if total pension funds exceed the lifetime allowance at when pension benefits are taken.

The lifetime allowance charge is applied to the excess over the allowance. This can apply in two different ways or both depending on how the excess is taken. The individual charges are;

• 25% if taken as income, and
• 55% if taken as a lump sum

It is unlikely that there will be much difference because, if someone takes the excess as income, he will be charged income tax on top of this tax charge, more than likely at 40%.

 

Additional Voluntary Contributions (AVCs)
It is now compulsory for companies to offer employees the opportunity to invest additional contributions into their occupational scheme where there is one, in order to boost retirement benefits.

Under existing revenue limits and since A- Day, if you are a member of an occupational pension scheme you can invest up to 100% of your total remuneration or up to a £255,000 in total.

Tax Reliefs & Contribution Limits
To receive full benefits of tax relief, pension contributions have to remain within a certain limit. Any additional contribution over the annual allowance will be subject to a tax charge.

Levels and bases of, and reliefs from taxation are subject to change.
Free Standing Additional Voluntary Contributions (FSAVCs)
Free standing additional voluntary contribution schemes (FSAVCs) were introduced in 1987.

These are run by a pension provider rather than the trustees of the employee's pension scheme. The big advantage tends to be the wider choice of investment available.

 

FSAVCs tax relief and contribution limits
To receive full benefits of tax relief, pension contributions have to remain within a certain limit. Any contribution over the annual allowance will be subject to a tax charge.

Level and bases of, and reliefs from taxation are subject to change.

 

SIPP Pension plans

For many people a SIPP pension has become an attractive and tax efficient method for long term saving.

Pension reform has widened the investment options available to the individual and has relaxed the rules which govern the purchase and sale of assets into a pension plan.

 

SIPP Pension Benefits
Another major change introduced from April 2006 is in the way individuals can take benefits or draw upon assets within a pension. When an individual wishes to retire, there is greater flexibility and choice when it comes to deriving an income.

Individuals now have the option of pension drawdown as well as the purchasing of an annuity - this gives greater control over the initial level of income derived and income flexibility during retirement.

A SIPP will allow regular and lump sum cash payments, and you will also be able to transfer other pension arrangements into the scheme. If you are employed, your employer can also pay into the plan. In addition SIPPS will allow investments from a wide range of sources including Commercial Property, shares and unit trusts.

 

Annual Allowance
Since A-Day, annual pension contributions have a new limit attracting full tax relief. Any contribution over the annual allowance will be subject to a tax charge.

 

Lifetime Allowance
As well as an annual allowance charge, there is a possible lifetime allowance charge if total pension funds exceed the lifetime allowance at when pension benefits are taken.

 

State Earnings Related Pension Scheme (SERPS)
The State Second Pension (S2P) replaced SERPS with effect from 6 April 2002. Only those who have been employed between 1978 and April 2002 are entitled to SERPS subject to their National Insurance contribution record. Those who have always been self-employed are not.