Personal pension plans

Providing retirement benefits based on the accumulation of a ‘pot’ of money

A personal pension plan is a type of defined contribution arrangement. This scheme provides retirement benefits based on the accumulation of a ‘pot’ of money, accumulated through the investment of contributions paid by both the employee and the employer. It is essentially an investment policy that provides an income in retirement. It is available to any UK resident who is under 75 years of age.

The policyholder contributes to the plan, the money is invested and a fund is built up.

The amount of pension payable when the policyholder retires is dependent upon:

The amount of money paid into the scheme

How well the investment funds perform

The ‘annuity rate’ at the date of retirement (an annuity rate is the factor used to convert the ‘pot of money’ into a pension).The policyholder can retire at any age after 55 (subject to plan restrictions). When the policyholder does retire, they can generally take up to 25 per cent of the value of their fund as a tax-free lump sum. The remainder of the fund can be used to buy an annuity with an insurance company.

Would a personal pension plan be good for you?
Your decision will largely depend on how much you can afford to save for your pension and how much you will get from other pensions.

Personal pension plans may be suitable for:

People who are self-employed

People who are not working but can afford to pay for a pension

Employees whose employer does not offer an occupational pension scheme

Employees who have the option to pay into an occupational pension, but choose not to

Employees on a moderate income who wish to top up the money they would get from an occupational pension

A personal pension plan may not be the best choice if:

Your employer offers an occupational pension scheme

Your employer offers access to a stakeholder pension scheme, with an employer contribution