Private Pensions

This is an outline of a big subject. It is designed to give an overall picture of non-state pension opportunities and not be a definitive statement of every detail of each scheme.

Rates and limits may change from time to time and are available here

Individuals who are self-employed or employed and not in an Occupational Pension Scheme (OPS) can obtain tax relief, subject to level of earnings, on contributions made to Personal Pension Schemes (PPS) (formerly Retirement Annuity Premiums), In some circumstances those in an OPS may also take out a PPS.

Any individual (unless in an OPS and either a controlling director or earning over £30,000) can obtain tax relief on pension contributions up to £3,600 annually not subject to earnings and even if there are no earnings – the so-called stakeholder pension.

OPSs are sometimes replaced by Small Self-Administered Schemes (SSAS).

Occupational Pension Schemes

A pension scheme set up by an employer for the benefit of his employees and approved by the Revenue provides several tax advantages:

• contributions by employer are tax-deductible
• contributions are not emoluments or benefits-in-kind
• contributions by employee are tax-deductible, and
• there are tax concessions at maturity for both lump sums and pensions
• the fund is exempt from income tax and capital gains tax

Remember, though, the Revenue have to approve the scheme and there are strict rules and limits within which the fund has to operate. These include maximum permitted benefits.

Contributions by employees may be mandatory or voluntary (Additional Voluntary Contributions – AVCs) and are subject to an upper limit. AVCs may be made to another scheme.

Small Self-Administered Schemes

Personal Pension Schemes

Any individual who isn’t a member of an OPS and either a controlling director or earning over £30,000 may take out a PPS.

Employees who take out an appropriate PPS may opt out of an OPS or the state second pension (S2P).

A PPS uses a pension provider such as a bank during its existence. The fund generated is used either to make income withdrawals on retiring or purchase an annuity. 25% may be taken as a lump sum.

Contributions are paid net of tax. If there is unused tax relief an employer may make contributions up to that level and deduct the amount in his tax computation.

Stakeholder Pensions

Employers who employ 5 or more employees may have to make a stakeholder pension available to their staff if they don’t offer an occupational scheme.

Financial services companies such as insurance companies, banks, investment companies and building societies provide stakeholder pensions. You can approach a stakeholder pension scheme provider directly.

Stakeholder pension schemes may only charge 1% of the value of your fund for administering it.

Minimum contributions are £20 at whatever interval you choose.

Tax relief is available to everyone who pays into a stakeholder pension scheme, even to those who do not pay tax.

You can invest up to £3,600 in your pension each year, no matter how much you earn.

Individual Savings Accounts (ISAs)

Strictly these aren't pension vehicles, coming more under the heading of 'Savings', but it's useful to look at all possibilities in providing for your old age.

A pension will probably be a better investment for the long term, but there are features which may give ISAs an advantage as a parallel savings vehicle.

Pension premiums will usually attract tax relief the funds are largely free of income tax and capital gains tax. On retirement, you will be able to draw a tax-free lump sum of about 25% but the balance must be used to buy an annuity.

ISA investments do not attract tax relief, but the funds are exempt from income and capital gains tax.

With ISAs, though, your money is not tied up until retirement, or even then, as withdrawals are allowed. At retirement you may withdraw 100%, not just about 25% as with a pension. It can also be used as an emergency fund which is much more difficult with pension.