Pension Facts

Golden Rule

• Once a contribution to a pension has been made the money cannot be accessed until you are 50 (55 after April 2010).

• If you are under the age of 75 and a UK resident you should be eligible to contribute in to a pension.

• Annual contributions to a personal pension are limited to 100% of gross UK earnings, subject to a maximum of £245,000 (2009/10 tax year). If this allowance is exceed you may have to pay tax at 40% of the excess.

• Any income or capital gains made within a pension plan are free of income tax and capital gains tax.
  
  
• There is no limit to the number of pension plans you can contribute to so long as the overall maximum amounts are kept to. 

• To credit your pension with a gross contribution of £1,000 you only need to pay in £800 as the HM Revenue & Customs will provide an income tax rebate of £200 and pay this directly in to your pension to make it up to £1,000.

• Higher rate taxpayers can claim a further 20% rebate via their tax return, so £1,000 in your pension fund will only cost you £600 of your own money. However this higher rate relief will be tapered down to basic rate relief for those earning over £150,000 per annum from April 2011.

• To prevent those earning over £150,000 per annum making 'irregular' contributions (i.e. larger than have been made in the past) to their pension before April 2011 to take advantage of this higher rate tax relief while it lasts, the government has imposed a restriction on individuals making larger contributions to their pension over and above their normal pattern of saving. Anyone that contributes more than £30,000 to their pension in a tax year will fall under these restrictions if this is not in keeping with their normal contribution history in previous tax years.
    
• Those that have no income can still contribute a maximum of £3,600 gross per annum – that is you put in £2,880 and the Revenue will put in £720.

• There is a limit to the overall size of your pension assets that is allowed - the lifetime allowance. This is £1.75 million in the 2009/10 tax year. If your total pension assets are close to or already exceed this limit, or may do once a contribution has been made then it is important that you seek expert independent advice on this matter before taking any action. If the allowance is exceeded you may have to pay up to 55% as a tax charge on the excess. 

• Assets built up within a pension will pass to your beneficiaries on death, as long as you have completed an 'expression of wishes' form, and will be free of any inheritance tax.

• When you retire you can normally take up to 25% of the value of your personal pension fund as a tax free lump sum.

• You could take your pension and still continue to work if you wish. This may be a valuable option for those looking to work a reduced number of hours each week towards retirement. However this will of course depend on your employer.

• The remainder of your pension fund can then be used to purchase an annuity. This will provide a guaranteed income for the rest of your life. The amount of income the provider offers you will depend on the value of your fund, the options you take with the annuity and your personal details such as gender and age.

• There are a wide variety of options now when you are at the stage of wanting to take an income from your pension fund so do seek independent advice before making any decisions.

• Retirement age – the retirement age at which personal pension benefits can be taken will increase from 50 to 55 from 6^th April 2010. The state retirement age remains at 65 for men and 60 for women. However for women this will increase from 60 to 65 gradually between 2010 and 2020 depending on your date of birth.

• Triviality – if the value of all your pension assets is below 1% of the lifetime allowance then you can withdraw all of the assets as a cash lump sum after the age of 60. In 2009/10 the lifetime allowance is £1,750,000 and so if all of your pension assets are worth less than £17,500 and you are over 60 years of age then you could just withdraw this amount as a lump sum. However only 25% of the total sum will be paid out tax free, the remaining 75% will be taxed as normal income although it will be paid as a lump sum.

• There are two main types of pension – a personal pension and a company (or occupational) pension.

• The two types of occupational pension scheme are a final salary (defined benefit) and a money purchase (defined contribution).

• Money purchase schemes are similar to a personal pension in that a retirement fund is built up over the years and used to purchase an annuity on retirement.

• Final salary schemes encourage the employee to build up a number of years in service and use that to determine the level of benefit they will receive on retirement as a proportion of their final salary leading up to retirement.

• Personal and stakeholder pensions are a product you can take out yourself to take ownership of the income you can look forward to in retirement. A fund is built up depending on the amount you contribute and the length of time those contributions are made for. The way in which the fund is invested can also have a significant impact on the end value at retirement.

• Self-Invested Personal Pensions (SIPP) have become more popular to the masses but remain a type of personal pension primarily for people that have more complicated investment requirements and potentially larger investment pots. It’s a specialist type of personal pension that allows you to invest in a far broader range of investments that are not permitted in normal personal pensions such as futures, options, REITs (real-estate investment trusts) and unquoted shares.

• Some SIPPs are now so low cost they include no set up charges and no annual administration charge, which has lead to their increase in popularity.

Tax levels, bases or reliefs referred to are those currently applying but are subject to change. The tax treatment of investments will depend on the individual circumstances of the investor.