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Personal Pension Plan


What is it?

Personal pension plans (PPP) have now been around since mid-1988. They were introduced by the UK government to enable the self-employed, and employees working for companies not operating a group pension scheme, to build up a pension fund for retirement.

PPPs are money purchase schemes with contributions receiving tax relief. An employer may contribute to an individual’s PPP but this is not obligatory. PPPs can move with individuals when they change jobs.

Eligibility

To be eligible to invest in a PPP and receive tax relief on personal contributions, an individual investor must be under 75 years of age, and resident in the UK (there are some exemptions for individuals who work for the UK Government or have left the UK in the last few years).

Contributions can also be made by your employer or a third party e.g. parent or spouse.

Contribution Limits

The minimum contribution will vary between providers but is usually around £20 per month, contributions can be stopped at any time.

Given the many tax advantages that are available with regard to funding a personal pension there are limits to the tax-relievable contributions that can be paid. Individuals are able to make contributions of up to the greater of £3,600 or 100% of their annual earnings to all of their pensions each tax year and receive tax relief on them.

There is an annual limit on the total amount of pension contributions that each person can make without incurring a tax charge (this includes employer and employee contributions). This is called the Annual Allowance. Where the total employer and/or individual contribution exceeds the Annual Allowance a tax charge will apply. The rate of tax will be determined by your taxable income in the tax year. For the 2018/19 tax year the Annual Allowance has been set at £40,000. However it may be possible for contributions in excess of the Annual Allowance to be paid in some circumstances under the rules which allow unused Annual Allowance from the 3 previous tax years to be brought forward and added to the current year’s Annual Allowance.

From 6 April 2016, individuals who have adjusted income (income plus employer pension contributions) for a tax year of greater than £150,000 will have their annual allowance for that tax year restricted. It will be reduced, so that for every £2 of income over £150,000, their annual allowance is reduced by £1.

The maximum reduction will be £30,000, so anyone with income of £210,000 or more will have an annual allowance of £10,000. High income individuals caught by the restriction may therefore have to reduce the contributions paid by them and/or their employers or suffer an annual allowance charge.

The tapered reduction doesn't apply to anyone with threshold income (income less personal pension contributions) of no more than £110,000.

Taxation

Contributions to Personal Pensions generate direct tax savings. Contributions are made net of basic rate tax relief, which means that you will only actually contribute £80 net for every £100 of contributions paid. Higher and additional rate taxpayers likewise make contributions net of basic rate tax and can then claim additional relief via their Inspector of Taxes/Self-Assessment return.

Your pension contributions once made will be invested in funds where there is no liability to tax on capital gains and where all forms of investment income (except dividends) are also tax free. Your money may therefore grow faster in a Personal Pension than in most other forms of investment.

An employer is able to contribute, and receive corporation tax relief on any amount that their local inspector of Taxes is satisfied meets the “wholly and exclusively” for the purpose of the business test.

All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs’ practice. Levels and bases of tax relief are subject to change.

Withdrawals

The earliest age upon which you can take benefits is age 55. The minimum age will increase to 57 from 2028 with further increases as the State Pension Age goes up.

At retirement you have the option to take up to 25% of the fund as a tax free cash lump sum, the remaining funds will be taxed as income at your marginal rate(s) of income tax.

There is now no upper age limit by which retirement benefits must be taken.

There are no restrictions on people’s ability to draw down from their defined contribution pension pots after age 55, this will allow flexible access to your pension savings.

This means there is no particular product that you must purchase or invest in when accessing your savings. It will be up to you to decide how you want to access them, either as a lump sum or through some sort of financial product.

If the total value of your pension benefits exceeds the “Lifetime Allowance” the excess benefits will be subject to a tax charge of up to 55%. For the 2018/19 tax year the Lifetime Allowance is £1,030,000 but it may be possible to keep a higher lifetime allowance if one of the forms of protection is applied for:

  • Individual Protection 2016 (IP2016) – available to those with total pension savings greater than £1 million on 5th April 2016. IP2016 will allow those individuals meeting certain criteria to fix their lifetime allowance at the value of their pension fund as at 5th April 2016, with the maximum protection being £1.25 million. Pension funding can continue but further funding is likely to be subject to a lifetime allowance charge.
  • Fixed Protection 2016 - doesn’t require a minimum fund value but is aimed at those who expect their pension funds to exceed £1 million at retirement. It fixes the individual’s lifetime allowance at £1.25 million but doesn’t allow any further pension funding after 5th April 2016.

Payment on death

The value of the pension fund is available to your beneficiaries on your death and can normally be withdrawn as a lump sum or left within the pension wrapper to be drawn on to provide a regular or ad-hoc income – further details are contained in the accompanying literature.

Death benefits, whether drawn as a lump sum or income, are normally payable tax free to your beneficiaries if you die before age 75. If you die after age 75, death benefits withdrawn as a lump sum or income are taxable on the recipients as earned income.

The only death benefits that are tested against the lifetime allowance are those payable from uncrystallised funds (i.e. funds you haven’t yet drawn on at all) either as lump sums or into flexi-access drawdown on death before age 75. If those benefits exceed your remaining lifetime allowance there will be a 55% tax charge on the excess if taken as a lump sum or 25% if used to provide income (includes placing the funds in drawdown).

Pension Credit

Pension Credit is a State benefit that provides additional income to pensioners on a means tested basis. It consists of two parts (people might be eligible for one or both elements):

  • the guarantee credit, available from the current State Pension Age* (i.e. 65 for men and various ages from age 63 for women), which tops up weekly income to a prescribed level (£163.00 (for single people) or £248.80 (for couples – living together, not necessarily married) in 2018/19) and
  • the savings credit, available from age 65*, which was introduced as a reward for those who make modest additional savings (it is worth up to £13.40 per week (single people) and £14.99 (couples) in 2018/19).

The savings credit element of pension credit has been abolished for those reaching state pension age after 5th April 2016 (unless your spouse/civil partner had reached state pension age before 6th April 2016 and was already in receipt of savings credit). The guaranteed element of pension credit will remain as a last resort for those who need it.

By the mid-2030s, the government estimates that over 80 per cent of people reaching their State Pension age will receive the full single tier pension which is set above the level at which Guarantee Credit would be payable. This means that the number of people eligible for Pension Credit will reduce over time.

If your estimated income in retirement means that you could be eligible for Pension Credit this might mean that some or all of the benefits from this pension plan are merely replacing income that you would have received via Pension Credit anyway.

*The qualifying age for Pension Credit is gradually increasing as State Pension Age increases – it will reach age 65 for men and women by November 2018, age 66 for all by October 2020 with further increases planned to at least age 68.

The minimum age that the savings credit element of Pension Credit can be claimed is age 65, and as this element was abolished in April 2016 with the introduction of the single-tier pension, further increases to SPA will be irrelevant.

Risk Considerations

There are a number of risk considerations that need to be taken into account. It is important that you are aware of these in relation to your particular circumstances.

  • The illustration uses certain assumed rates of growth, as prescribed by the Financial Conduct Authority. The figures used within the illustration are only examples and are not guaranteed.
  • What you will get back depends on how your investments grow and on the tax treatment of the investment
  • The value of your pension fund can go down as well as up and the value will depend on how much is saved, the charges paid and the rate at which the investment grows
  • Past performance is no guarantee of future returns
  • There is no guarantee that the performance of your investment will achieve the growth rate required
  • If growth is low, charges may eat into the capital invested
  • Any employer contribution to your plan is dependent upon the continued solvency of your employer
  • In the event that your employment status changes, it is important that your retirement planning is reviewed
  • Depending how it is taken, your pension income may also depend on interest and annuity rates at the time you retire
  • This investment is intended as a long-term investment and under current HM Revenue & Customs’ practice it is not normally possible to access the fund(s) prior to the age of 55. The minimum age is expected to increase to 57 from 2028 with further increases as State Pension Age goes up.
  • The current tax treatment and annual contribution limits may change in the future
  • Please be aware that there may be occasions when an individual fund or funds may have a higher risk rating than your overall stated attitude to risk. If this is the case, then the overall risk rating applied to all of the combined funds recommended will still be designed to meet your stated tolerance.