Individual Pensions

An individual pension can allow you to save for your retirement, especially if you are self-employed or you do not have access to a company pension scheme. This personal pension pot always you to continue saving regardless of where you are working. You can even pay into an individual pension if you are not working, but only up to certain limits.

There are three main types of individual pensions:

  • self-invested personal pensions (SIPPs);
  • stakeholder pensions;
  • personal pensions;

A self-invested personal pension is a specialist type of pension for those who want to make their own investment decisions and are comfortable with the higher risk associated with these plans. Stakeholder and personal pensions are a money purchase type of pension, where stakeholder pensions being particularly suitable if you can only afford to save small sums.

All three types benefit from tax relief - for every payment you make into your pension, subject to current government limits, you will also get a tax relief payment from HM Revenue & Customs. The impact of taxation (and any tax relief) depends on individual circumstances.

This is based on our understanding, as at February 2012, of current taxation, legislation and HM Revenue & Customs practice, all of which is liable to change without notice.

Self-Invested Personal Pensions (SIPPs)

A Self-Invested Personal Pension (known as SIPP) is a type of UK-government-approved personal pension scheme, which allows individuals to make their own investment decisions from the full range of investments approved by HM Revenue & Customs (HMRC).

To purchase a self-invested personal pension, you have to be:

  1. Under 75 years of age.
  2. A United Kingdom resident or a Crown servant or the spouse or registered civil partner of a Crown servant.

SIPPs are a specialist type of personal pension that enables you more flexibility to choose where you want your retirement savings to be invested. This pension plan is perfect for you, if you want to make your own investment decisions and if you are comfortable with taking on the higher associated risk. As typically SIPPs have higher charges than stakeholder pensions or personal pensions, they are more suitable for large funds with at least £60,000.

Making sure that you do not exceed the maximum pension contribution limits, you can put money into a SIPP even if you are already contributing to another pension scheme, such as a company pension scheme or a personal pension plan. However, since SIPPs are more expensive than other types of pensions, it is a good idea to make sure that you are really going to make use of the investment flexibility that SIPPs offers.

Main SIPP types:

  1. Deferred

This is effectively a Personal Pension scheme in which most or all of the pension assets are generally held in insured pension funds. However, some providers will offer direct access to mutual funds. Self-investment or income withdrawal activity is deferred until an indeterminate date, and this gives rise to the name.

  1. Hybrid

A pension plan in which some of the assets must always be held in conventional insured pension funds, with the rest being able to be 'self-invested'. This has been a common offering from mainstream personal pension providers, who require insured funds in order to derive their product charges.

  1. SIPP Lite or Single Investment

It features much lower fees for investments that are typically placed in only one main asset. For these purposes, an investment platform or a Stockbroker/Discretionary Fund Manager account usually is classed as a single investment.

  1. Pure or Full

Schemes offer unrestricted access to many allowable investment asset classes.

SIPP Investment Choices

You can hold a wide variety of investments in a self-invested personal pension, from shares and investment funds to commercial property and futures and options. The scheme gives you the freedom to choose and manage these investments yourself. Investors may make choices about what assets are bought, leased or sold, and decide when those assets are acquired or disposed of, subject to the agreement of the SIPP trustees.

Most SIPPs allow you to select from a range of assets, such as:

  • Investment trusts;
  • Commercial property (such as offices, shops or factory premises, but NOT residential property);
  • Government securities;
  • Traded endowment policies;
  • Particular stocks and shares quoted on a recognised UK or overseas stock exchange;
  • Insurance company funds;
  • National savings products;
  • Investment trusts;
  • Deposit accounts with banks and building societies.

All assets are permitted by HMRC, however some will be subject to tax charges.

The assets that are not subject to a tax charge are:

  • Stocks and shares listed on a recognised exchange;
  • Gold bullion, which is specifically allowed for in legislation;
  • Futures and options traded on recognised futures exchange;
  • Commercial property;
  • Ground rents (as long as they do not contain any element of residential property);
  • Traded endowments policies;
  • Derivatives products such as a Contract for difference (CFD);
  • Validated carbon credits (VCS & Gold standard);
  • Authorised UK unit trusts and OEICs and other UCITS funds;
  • Unauthorised unit trusts that do not invest in residential property;
  • Investment trusts subject to FSA regulation;
  • Unitised insurance funds from EU insurers and IPAs;
  • Deposits and deposit interests;
  • Unlisted Shares.

The amount of pension you will get at retirement from your SIPP will depend on:

  • How much you have contributed to the fund;
  • The charges made by your SIPP provider;
  • How well your investments have performed;
  • The type of annuity you choose;
  • Annuity rates at the time you retire.

You can take a tax free lump sum from your SIPP, plus an income between the ages of 50 and 75.

Stakeholder Pensions

Stakeholder pension scheme is a type of personal pension plan with statutory minimum standards, targeted at individuals on more moderate incomes. It is flexible money purchase arrangement with capped management charges, and enable employees to continue making contributions to the scheme if they change jobs. Since they cannot make any charges for missed contributions, stakeholder schemes are created to accept low-value and irregular payments. The minimum payments are low and you can stop and re-start payments any time you wish. In general, Stakeholder Pensions are especially suitable for those, who do not have access to an occupational pension and can only afford to save small sums.

To be eligible for a stakeholder pension you must be:

  • Under the age of 75;
  • A resident in the UK, or a Crown servant or the spouse or registered civil partner of a Crown servant.

To take out a stakeholder pension you can be:

  • self-employed;
  • a fixed contract worker;
  • without a job;
  • taking a career break.

The pension you receive does not depend on your salary! The managers of the stakeholder pension scheme invest the pension fund on your behalf, so the value of your pension fund will be only based on how much you have contributed and how well the fund's investments have performed.

You can save as much as you like into any number and type of pensions, including stakeholder pensions. You get tax relief on contributions of up to 100 per cent of your earnings each year. This is subject to an annual allowance which is £50,000 for the 2012/13 tax year.

Minimum Standards of Stakeholder Pensions

Stakeholder pensions must meet a number of minimum standards to make sure they offer value for money, security and flexibility. These standards include:

  1. Limit on annual management charges

A capped charging structure: a maximum of 1.5% of your pension fund a year for the first 10 years and 1% a year thereafter.

  1. Security

The scheme must be run by an authorised stakeholder manager or by trustees, whose responsibility will be to make sure that the scheme meets all legal requirements.

  1. Flexibility

Retirement age can be at anytime between the age of 55 and 75, and at retirement, the option exists to take 25% of the fund as a tax-free amount. You can stop, re-start or change your contributions whenever you want - there are no penalty fees to this pension plan. Also, you can switch to a different pension provider without the provider you leave charging you, and you can start contributions from £30 (or less), and pay weekly, monthly or at less regular intervals. A default investment fund must be available if you do not want to choose your own investments.

Investment Choices of Stakeholder Pensions

The range of funds typically covers these types:

  • Gilt and fixed interest (bond) funds;
  • Index tracker funds;
  • Risk-based managed funds;
  • UK and overseas equity funds.

There is always a possibility to pick the 'default' fund for people who do not want to make investment decisions. In the years leading up to retirement, the default fund gradually moves into less volatile investments, providing greater security.

The Main Benefits of Stakeholder Pensions

  • There are low minimum payments;
  • You do not need to be employed in order to save in a stakeholder pension;
  • You receive tax relief on your contributions up to HM Revenue & Customs limits - the more you save, the more you get in tax relief;
  • Other people can pay into a stakeholder pension on your behalf (such as family members or an employer);
  • You can choose when and how often you pay into the scheme and there are no penalties if you miss a payment;
  • Charges made by the pension fund provider are capped.

Is a Stakeholder Pension Right For Me?

A stakeholder pension might be a good choice if:

  • Your employer does not offer a company pension scheme;
  • You are self-employed;
  • You are not working, but can afford to pay for a pension;
  • You have no existing pension apart from a state pension;
  • You want to top up your company pension.

If you change jobs, you can always continue paying into your stakeholder pension. However, if you decide to stop paying into a stakeholder pension, you can leave the pension fund to carry on growing, but you should check whether there are extra fees for doing so.

Personal (Private) Pensions

A personal pension (also known as a private pension) is your own private pension that you can take from job to job and it is a type of money purchase pension. It is an ideal way to provide you with a regular income in your retirement if you are self-employed or if you do not have access to an occupational pension plan.

To purchase a personal pension, you must be:

  1. Under 75 years of age.
  2. A United Kingdom resident or a Crown servant or the spouse or registered civil partner of a Crown servant.

Choosing a personal pension scheme is an important financial decision and there are many things to consider, like:

  • What are the rules on making contributions?
  • How much does the pension provider charge you for setting up your pension and for administration?
  • How much can you save and is the pension plan ‘contracted out’ of the additional State Pension?
  • How will the money be invested?

How Personal Pensions Work?

Put simply, you pay a lump sum or a regular amount to the pension provider who claims tax relief at the basic rate and adds it to your fund before investing it on your behalf. And then, when you retire, you can take a tax-free lump sum from your fund, and use the rest to buy an annuity, which will give a regular taxable income for life.

You are allowed to have a personal pension as well as belonging to an occupational pension plan. Other people can pay into a personal pension on your behalf. This means that partners or other family members can help you save for your retirement.

The final value of your pension pot at retirement will depend on many factors like:

  • How much you have contributed to the fund;
  • The charges made by your pension provider;

(Annual management charges (AMCs) to cover administration and management will cost around 0.5-1.5% a year. However, some providers may offer tiered AMCs, which fall as your fund grows.)

  • The type of annuity you choose;
  • How well your investments have performed;

(You can invest up to 100% of your earnings (subject to an annual limit of £285,000 in the tax year 2011/12). However, if you hold more than one pension, this limit applies to the total amount of contributions paid across all your pension plans.)

  • Annuity rates at the time you retire.

A personal pension may be bought from high street banks, investment organisations, insurance companies and even some retailers, like supermarkets and high street shops.

Personal Pension Investment Choices

Personal pensions can be invested in a wide range of pension funds, and many personal pension providers also offer externally managed funds. You will need to consider the target income you wish to achieve for your retirement and your attitude to risk before selecting your investment fund. There are several types of funds in which you could be investing:

  • Green/ethical funds;
  • Property funds;
  • UK and overseas equity funds;
  • Index tracker funds;
  • Risk-based managed funds;
  • Gilt and fixed interest (bond) funds;
  • Cash funds;
  • Emerging market funds.

Even though normally you can switch between the investment funds of your provider at any time, there can be a fee for doing so.

The main benefits of a Personal Pension

  • You do not need to be working to save in a personal pension scheme.
  • Other people can pay into a personal pension on your behalf.
  • You get tax relief on your contributions up to HM Revenue & Customs limits.
  • You may be able to choose the funds you invest in.
  • You can choose to take a tax-free lump sum of up to 25% of your total pension when you retire.

Is a Personal Pension Right For Me?

A personal pension may be a good choice if:

  • You are self-employed;
  • You are employed but your employer does not offer an occupational pension plan;
  • You are not working but can afford to pay into a pension.

However, it may not be right if:

  • Your employer offer access to an occupational stakeholder pension plan.
  • Your employer offers access to an occupational pension plan, and if so, you should seriously consider joining it.
  • You might need to vary the payment amounts, or stop and start payments. In this case, a stakeholder pension may be a better choice.
  • You want to top up your company pension plan (However, paying additional voluntary contributions (AVCs) may be a better way of doing this).

If you change jobs, you can continue paying into your personal pension. However, it is worth checking to see if your new employer offers an occupational pension scheme, as this may offer you a better deal, especially if your employer contributes.

When Can I Take My Personal Pension?

From 6th of April 2010 the earliest age you can take your personal pension is 55, but most people choose to wait until they are 60 or 65. You can also put off taking your pension until you are 75, you do not have to retire from work to get your pension benefits.

There are certain circumstances that will allow you to take your pension even before you are 55. Your pension scheme provider will be able to tell you what your pension plan allows.