PERSONAL PENSIONS: As a rule, there will be an age limit on when you can take a personal pension.
Even so, personal pensions tend to have a lot of flexibility. This is partly because you will arrange your own personal pension – in most cases.
Personal pensions are usually based on how much money gets paid into the ‘pension pot’. This is why they are also called ‘money purchase‘ or defined contribution pensions.
Note: It is not uncommon for employers to offer workplace pensions in the form of personal pensions.
A pension provider invests the money paid into a personal pension. In most cases, these investments form part of a larger shares fund. Thus, there is no guarantee of the amount you will get when you take the pension.
The money that accrues in a personal pension (the fund) depends most on three basic factors:
- How much money gets paid into the fund.
- The performance of the investments (shares). Note: Investments such as these can go up or they can go down.
- How the money gets taken as a personal pension (e.g. in part payments or in full).
Personal Pension Types
There are several different types of personal pensions available in the United Kingdom. The popular ones include:
- Stakeholder Pensions: These must meet specific government requirements including limits on charges.
- Self-Invested Personal Pensions: A SIPP pension allows some control on specific investments that make up the fund.
You can search the Financial Services Register through the Financial Conduct Authority. This is an easy way to check if your pension provider has registered with the FCA. Use the Pensions Regulator if yours is a stakeholder pension.
Payment Methods for Personal Pensions
There are several ways to make payments to a pension provider. They allow you to make an individual lump sum or smaller regular payments.
Either way, they send out annual statements to inform you the value of your fund.
Most pension schemes registered with HM Revenue and Customs get some relief on taxation. HMRC give tax relief on private pension contributions.
Note: You cannot get this tax relief if your scheme is not registered.
Choosing a Personal Pension
Do some research before you choose one of the hundreds of personal pensions on the market. Choosing the best pension for retirement income can often be confusing. So, here are a few pointers to consider:
- Take some time to get lots of information before making a decision. Shopping around will provide you with a wide choice of what is available.
- There are several free and impartial comparison websites like www.moneyadviceservice.org.uk. They will help you find a pension provider and compare their products.
- Always compare pension products and get the key facts from the different providers. They must give you this key information. If they refuse you can file a complaint (see below).
- In some cases, there will be a minimum payment required. Thus, be sure your finances will cover the contributions of a personal pension.
- Determine whether you will have charges to pay and when they need paying. As a rule, they include pension transfer charges, administration fees, and management costs. There may be penalties for missing a payment or for taking your pension early.
- Check how your provider will invest the funds and whether you have any choices. There is a level of risk with most personal pensions.
- Always get proper advice from an independent financial adviser. Never sign any documents until you are happy and informed.
Independent Financial Advice
There are several ways to find an independent financial adviser. You can contact ‘Unbiased’ or ‘Personal Finance Society’. But, there may be a fee for this advice.
Taking a Personal Pension
Very few personal pensions allow you to take money from them before reaching the age of 55. Your pension provider will confirm the age limit if you are unsure when you can take cash from the pension.
As a rule, you can take out an initial tax-free lump sum of the money built up in the pension pot. There is no tax payable on the first 25%. But, you may need to pay tax on the remaining 75%. You must start taking the 75% within 6 months of the first withdrawal.
There are several different options for taking the rest of the pension pot. You can either:
- Take it all (or some of it) as a cash withdrawal.
- Buy a product that provides you with a guaranteed income for life. These are also called ‘annuities’.
- Invest the money again to get a regular, adjustable income. These are also called ‘flexi-access drawdowns’.
You will need to confirm what options are available with your particular pension. Some providers may not offer them all. You can choose to transfer a pension pot to a different provider if you prefer.
Taxes and other Charges
The pension provider deducts any tax owed to HMRC before you receive the money from your pension pot.
Some pension providers will charge a fee for withdrawing cash from the pension pot. You should check this with your particular provider.
Note: Taking large amounts can result in paying higher rates of income tax. In some cases, there may also be extra tax owed at the end of the tax year.
Regular Payments from an Annuity
Some insurance companies offer annuities. An annuity provides regular payments for life. In some cases, your provider can pay for an annuity out of your accumulated pension pot.
Annuity payments vary due to several factors. It generally depends on how long the insurance company expects the policy holder to live. That usually determines how many years they will need to make payments. When the company calculates the amount they will consider:
- The policy holder’s age and gender (and health in some cases).
- The size of the pension pot.
- Current interest rates.
There are several different kinds of annuity policies. Some have a fixed time (e.g. payments for 10 years instead of a lifetime). Other continue paying a spouse or a partner after the policy holder dies.
Note: You are not compelled to buy an annuity from a pension provider.
Investing the Money into a Drawdown Fund
Some pension providers will be able to invest a pension pot in a flexi-access drawdown fund. The fund from a flexi-access drawdown means you can:
- Make withdrawals.
- Buy a short-term annuity giving regular payments for up to 5 years.
- Pay extra money into the fund. But, tax is liable on contributions more than £4,000 per year.
Keeping a Capped Drawdown Fund
The money stays invested in a ‘capped drawdown‘ fund if you want to keep it. Even so, you can continue withdrawing and paying money in.
The pension provider will set a maximum amount you can take out every year. The upper limit gets reviewed every 3 years until the holder turns 75. It then gets reviewed every year after that.
Withdrawing Cash from a Pension Pot
In some cases you can take cash ‘directly’ out of your pension pot. This means you could:
- Withdraw the whole pension pot or smaller cash sums.
- Pay money in. But, tax is liable on contributions more than £4,000 per year.
Times when You Cannot Withdraw Cash
There may be situations when you cannot take smaller cash sums. As a rule, it will be if any of these apply:
- Your savings in pension schemes has already reached £1 million over your lifetime. This is the lifetime allowance.
- You have one of the lifetime allowance protection schemes.
- You are below 75 and the sums you want to withdraw are over the amount of lifetime allowance that you have left.
Free and Impartial Help on Personal Pensions
The pension provider would be the first point of contact for help with a personal pension. Following that, The Pensions Advisory Service give free advice on pensions. But, they do not give financial advice.
Expert Financial Advice
The company ‘Unbiased’ can help you find a financial adviser but there is usually a fee to pay for their services.
People over 50
Contact Pension Wise for expert information about personal pension options. Those who are over 50 can book a free appointment. But, Pension Wise do not cover ‘final salary’, ‘career average’ pensions or the State Pension.
The UK State Pension
You should contact the Pension Service for further help with your State Pension.
Make a Complaint about a Personal Pension
Talk to your pension provider if you have a complaint about the way your pension scheme gets run. They must respond to you within 8 weeks. You can also contact the Pensions Ombudsman about the same problem.
Complaints about Pension Marketing
The Pensions Advisory Service or the Financial Ombudsman’s Service can help on the way a pension scheme got marketed to you.
The UK Government introduced stricter protection against pension scams. Bans will now include the use of emails and texts in private pensions cold calling.
If the Provider Breaks the Law
What if you believe the pension provider has broken the law? In this case you should complain to:
- The Financial Conduct Authority for personal and stakeholder pensions.
- The Pensions Regulator for workplace pensions.
If the Provider goes Bust
This depends most on whether the FCA authorised the pension provider. You might get compensation from the Financial Services Compensation Scheme (FSCS) if the provider is unable to pay.