Personal pension schemes

Pensions are widely considered the most tax efficient method of saving for retirement as tax relief is granted on annual pension contributions up to the greater of £3,600 or 100% of UK taxable earnings. Basic rate tax relief on contributions is reclaimed by the pension provider however higher rate tax payers claim the addition tax relief via annual self assessment Tax Returns.

Contributions are invested in a variety of asset backed investments which are exempt from Capital Gains Tax and where the investment income generated (except dividends) is tax free. Traditionally upon retirement between ages 55 and 75 up to 25% of the accumulated fund can be taken as a tax free cash lump sum with the balance being used to purchase an annuity.

The maximum annual allowance in respect of all pension arrangements is currently capped at £225,000 although this will increase each year (for example to £255,000 by the year 2010/11). Payments in excess of this amount in any one year will be subject to a 40% tax charge.

There are 3 main types of pension plan offered by insurance companies:

1. Stakeholder Pension Plans
Stakeholder Pension Plans are highly flexible arrangements with low charges capped by Government legislation. However the investments permitted will be generally restricted to a provider’s internal range.

No charges are made to switch investment funds or to transfer the arrangement to an alterative provider at a later date.

2. Personal Pension Plans
Personal Pension Plans tend to offer an increased investment range involving external fund managers. For this reason charges tend to be higher than Stakeholder arrangements.

3. Self-Invested Pension Plans
Self Invested Pension Plans are the most flexible arrangements, allowing for a wide range of investment opportunities. Investments currently permitted by HMRC include:

• Shares, bonds and deposits
• Unit Trusts, OEICs, Investment Trusts and Venture Capital Trusts
• Insurance Company Funds
• Derivatives
• Trustee Investment Plans
• Traded Endowment Plans
• Commercial Property
• Agricultural Land

Self-Invested Pension Plans also allow account holders to benefit from Unsecured Pension, previously referred to as Income Drawdown. This allows investors to leave the accrued pension fund invested whilst drawing an income within set parameters. Although not locked into an annuity, Unsecured Pension does carry investment risk as the pension fund could be eroded if the income elected is more than the actual investment return.