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Personal pension

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No matter what age you are, there are a number of ways for you to save for retirement. Everyone with the minimum number of contributing years is entitled to State Pension, but at just £110 a week, it’s often not enough to support your lifestyle.

One of the options available is a personal pension, which may be suitable for you if you’re self-employed, you’re unemployed, a company pension is not available, or you want to top up an existing pension.

How it works

By making regular contributions to your pension fund, it will build up over the years, thanks to interest and profit from investments. Depending on the type of personal pension you have, someone may do this on your behalf.

Then, when you come to retirement, you’ll have a pot of cash, which is used to purchase an annuity. This policy guarantees an income for the rest of your life. There are other options available upon retirement, but current legislation states an annuity must be purchased before the age of 75.

Your pension pot is not predetermined, it will be depend on how much you pay in over the years, how well your investments perform and any charges.

Types of pension

  • Standard: In order to compete with stakeholder plans, most standard personal pensions have brought their charges right down to 1-1.5%. but it’s important to be aware that there is no maximum limit. They offer around 40-400 funds, so more investment choice than stakeholder plans.
  • Stakeholder: this pension was introduced by the government to make it easier for those on low incomes to ave for the future. They work in the same way as a standard personal pension, but the charges can’t exceed 1% each year, the minimum contributions can’t be higher than £20 and there are no penalties for irregular contributions.
  • SIPPs: a self-invested personal pension means that you are responsible for managing your own investments within the fund. With a standard pension, this is done for you. However, there tends to be a wider choice of investments. It’s only worth considering a SIPP if you have prior investment experience.

personal pension

Tax relief

One of the biggest benefits to saving in a pension is that you can benefit from tax relief. As a UK taxpayer, you can save up to £50,000 a year without paying any tac on the contributions. You are able to contribute more, but depending on your annual income, you may have to pay 40% tax.

As it’s a personal pension, rather than a workplace pension, you will likely have already paid tax on the money you are contributing. Your provider should be able to claim the tax relief back and add it to your pension fund.

Investments

As mentioned, the money contributed to your pension is invested, in order to grow your fund before you retire. You will be able to discuss how you would prefer the money to be invested, but in most cases it will be managed by the provider (unless you have a SIPP). When deciding on investments, it’s important to consider the level of risk you want to take and how much you would like the fund to grow by.

Before making any decisions about your pension, it’s worth seeking independent financial advice.

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About Jemma Porter

About Jemma Porter

Jemma Porter is an experienced content creator who has written for a number of online publications. A self-confessed penny pincher; she's often found seeking out the best personal finance deals.

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