Personal Pensions

We all know the importance of saving money for when we retire. Without saving, we will have nothing to support us when our working lives are over. Not only is it important to save in order to support yourself, it is also important as it gives you income to spend on enjoying yourself.

Personal Pensions are technically a type of “money purchase arrangement”, which means that the money you pay regularly into your pension is invested on your behalf in assets such as bonds or stocks. You have a lot of control over where you money is invested, being able to choose a wide range of options. It is important to consider where you are investing your money, as what happens to the areas you invest it in will impact directly upon the lump sum that you receive upon the event of your retirement.

People often decide to have the payments towards their Personal Pensions invested in higher-risk areas at the beginning of their pension, as these areas are more likely to grow in value, therefore increasing the amount of their eventual lump sum payment at a greater rate than other, safer investment options. Later on in life, as they grow nearer to retirement, people tend to switch to less risky investments in order to protect their money, although this does reduce the rate at which their pension grows.

Personal Pensions have the benefit of being excluded from capital gains tax. The government gives you a base rate of 20% tax relief on pension payments, which your Personal Pensions provider can claim on top of what you have already paid in. This means that for every pound you pay in to your pension, the government adds twenty pence. If you are in the 40% tax bracket, you can claim an extra 20% tax relief on payments towards Personal Pensions.

Once you retire, you are paid a lump sum by your Personal Pensions provider. This can be turned into a regular income by buying an annuity. This is where you pay a portion of 75% minimum of your Personal Pensions lump sum in exchange for an income, which is paid regularly usually paid up to your death. You also have the option to go “income drawdown”, which means you can withdraw funds from your pension whilst the rest of the money remains invested. At the age of 75, government law means that you have to buy an annuity with the remaining money.

Every year your Personal Pensions provider will send you an annual forecast, telling you how much your pension is currently worth. The annual forecast will also give you an estimate of what your pension fund will be worth when you retire if you continue paying into it at the same rate as you presently are. Your pension balance when you retire will depend not only on how much you invested during your working life, but also on how well the money you invested performed in the market.