With a state pension no longer guaranteed, an individual personal pension is imperative to ensure you are financially secure in your retirement. If you consider yourself too youthful to be thinking about a pension and feel that you will think about a pension when you take up knitting – think again. Take advantage of the tax relief as soon as possible!
What is an individual personal pension?
A long-term investment that builds up funds that you can use in your retirement, a personal pension is a tax-efficient way to invest for your retirement.
How does an individual personal pension work?
Pensions don’t just come through work. You can set up your own personal pension, but of course then building up the pot is therefore 100% your responsibility. In the 1980s personal pensions got a bad rap, but things are different now – there are some great offers out there.
Personal pensions are ideal for the self-employed. A personal pension is not restricted to any employer or job – you can keep it whatever you do and wherever you go in the country.
You can invest in an individual personal pension in addition to or instead of your work pension. It is worth investing in both to benefit from the extra contribution from an employer. However, contributions to a personal pension do get tax relief, meaning the Inland Revenue will top up any contributions you make with a payment of their own.
You can choose to make regular pension payments or, if you prefer, make one off payments when you wish. The ‘annual allowance’ specifies how much you can pay into your pension each year and is currently set at £40,000.
HMRC adds a basic rate of tax relief to your pension payments, so if you make a payment of £160, £40 will be added in tax relief, taking your payment to £200.
If you pay a higher rate of tax, you can claim additional tax relief when you complete your self assessment, although this will not be paid into your pension plan.
If you want more control, starting a personal pension gives you a huge choice of insurance providers and a variety of investment opportunities.
If you do decide to take control of your own pension, make sure to keep track of any charges which can deplete your returns.
How do I choose an individual pension?
Choosing the right personal pension can seem daunting so it is worth chatting to a professional adviser before choosing. It is important to consider the charges, flexibility and performance of the pension on offer. Also make sure that you have:
- The potential to retire whenever you like without penalty
- The ability to stop paying contributions at any time without penalty (i.e during a career break)
- The freedom to vary contributions at any time
There are several types of personal pension from which you may be able to choose, depending on your personal employment status and circumstances:
- Self Invested Personal Pension (SIPP)
- Small Self-Administered Scheme (SSAS)
- Stakeholder pension
- Additional Voluntary Contributions (AVC)
- Company pension scheme
- Final salary pension scheme
- Money Purchase pension plan
- Pension release
The pension fund that wins you over will depend on your plans for retirement and also how much of a risk you want to take with your investment.
Your payments are invested into funds of your choice, with the aim of growing your overall hoard.
You should bear in mind that the value of your investment can decrease as well as increase, so you may ultimately receive less than you have invested.