Personal Pension Plans
A Personal Pension Plan is simply a savings plan that allows investors to save money for their retirement. Investors can choose from a range of pension funds to invest into.
Investing into a personal pension plan has certain benefits. You receive tax relief on your monthly and/or single premiums, although there are restrictions on the level of tax relief that will be available. In addition to tax relief pension funds grow free of capital gains tax (CGT) and this means that the professional fund managers can buy and sell asset freely without incurring this restrictive tax.
Pension legislation changed on the 6th April 2006 (A-Day) and, in theory, contributions into pension plans are now unlimited. Prior to A-Day contributions were paid in the form of monetary amounts (cash, cheque or direct debit). It is now possible to move an asset (such as property) into a registered pension scheme and have it treated as a relievable contribution. The main difference in pension legistlation is that everyone has an Annual Allowance, which is the limit of tax-relievable contributions that can be made each year. The Annual Allowance for the 2006/2007 tax year is £215,000.00. Everyone also has a Lifetime Allowance, which is the limit of pension savings anyone can take in their lifetime without tax penalty. The Lifetime Allowance for the 2006/2007 tax year is £1.5 million. The Annual and Lifetime Allowances will be reviewed every five years. Primary or Enhanced Protection is available for those individuals who already have accrued pension rights by A-Day that exceed the Lifetime Allowance.
It is possible to retire between the ages of 50 - 75, although by 6 April 2010 the earliest age will increase to 55. At retirement you are entitled to draw 25% of the value of your fund as a tax-free cash sum (up to 25% of the Lifetime Allowance). It is also now possible to include Protected Rights Benefits and AVC Benefits in the 25% tax-free cash. It is compulsory to use the remainder of the fund to provide an income in one of the following ways: - Secured pension, Unsercured pension or Alternatively secured pension (ASP).
Prior to A-Day it was not possible to commute the whole of your pension fund for cash. It is now possible for individuals to commute small pension funds for cash, providing that the total from all sources (including pensions already in payment) do not exceed 1% of the Lifetime Allowance (£15,000.00 for tax year 2006/2007). This is known as Triviality Commutation.
Although pension legislation has been simplified, it is important to seek independent financial advice on your options at retirement.