Preparing financially for the final day when you are entitled to put your feet up can be a very real worry, but can also be vitally important when it comes to ensuring you get the rest you deserve. While many people have pension schemes provided through their employers, for those who don’t, personal pensions are a way to make sure you have a guaranteed income to support you once you retire.
Even if your current workplace do provide a pension scheme, to some this may not feel like enough of a way to build up a nest-egg to provide for you. Alternatively, you might simply be self-employed, a stay-at-home mum or dad, or simply be unemployed.
Whatever the circumstances, a personal pension is a way that you can pay into a limit-free scheme that will provide peace of mind for now and the future. The way in which the scheme works is that you invest a regular amount of money, usually monthly, or sometimes a lump sum, to your chosen pension provider. They will then invest it on your behalf.
A personal pensions final value will depend on the amount which you have paid in, as well as how well the investments of the fund have performed over the period you have been paying into it.
Unlike employer pension schemes, where you might only be able to pay in a certain percentage of your wages each month, there is typically no limit to how much you can pay into a personal pension and the number of schemes that you can set up for yourself.
Once you turn 50, or 55 from 2010, you will be able to start taking an income from your scheme, and you must take it before the age of 75. While it is possible for you to invest as much as you would like into your scheme – up to 100 per cent of your monthly salary – this amount will depend on issues like the amount you want to take from your scheme upon retirement, your age, and when you want to retire.
However, there are also other bonuses to be had from a personal pension, such as tax relief on any investments you make, in deference to an annual allowance threshold, above which you will have to pay tax. Until you turn 75, you get tax relief on contributions of up to 100 per cent of your earnings each year, up to the annual allowance, which is currently £245,000 per annum, although this figure increases each year.
If your annual savings exceed this figure, then they will become subject to a tax charge. These schemes have been around since 1988, when they replaced retirement annuity plans, and also have the option of a lump sum payment on the date of your retirement.
This lump sum can be up to a quarter of the final value of personal pensions, with a limit of 25 per cent of the lifetime allowance – £1.75 million this year, but rising to £1.8 million by 2010/11. If you take a lump sum payment, you can then either use the rest of your fund to buy a regular income, payable for life, from a life insurance company; or take an income from the remainder of your fund while it continues to be invested in, up to the age of 75.