Personal Pension

A Personal Pension is a long term investment that aims to help you build up a pot of money, which you can use to buy an income when you retire or draw income as and when you want it subject to income tax on any taxable element.

This is a tax-efficient way to invest in your retirement because HM Revenue and Customs adds basic rate tax relief to any payment you make into your plan. Retirement income will depend on fund value and other economic factors, including inflation.

For example, if you make a payment of £160, HM Treasury will add £40, so the total amount invested is £200. (If you pay tax at more than the basic rate, you can claim even more tax relief when you complete your annual self-assessment tax return, although this won’t be paid into your plan.)

You can invest regularly or make one-off payments as and when you want. In each tax year, you can contribute up to 100% of your earnings, although a tax charge may apply if you exceed the Annual Allowance, which is currently £40,000. If you earn below £3,600, are not earning or don’t pay tax, you can contribute up to £3,600 and still receive 20% tax relief.

Investment will be made in funds of your choice, which depends on your retirement goals and your attitude to risk. (You should be aware, regardless of what you choose, that the value of your investment can go down as well as up.)

Your retirement benefits can be taken in a variety of ways, but will depend on your fund value and other economic factors such as inflation. Between the ages of 55 - 75, you can use the whole fund to buy a taxable retirement income, take a tax-free lump sum of 25% and have a smaller retirement income, or draw income as and when you want it (subject to income tax on any withdrawal in excess of the 25% tax-free allowance).

If you don’t take your pension benefits before age 75, you may unnecessarily incur extra tax charges.