Personal pension scheme
Encyclopedia
A Personal Pension Scheme (PPS), sometimes called a Personal Pension Plan (PPP), is a UK
tax-privileged individual investment vehicle, with the primary purpose of building a capital sum to provide retirement benefits, although it may also be used to provide death benefits.
These plans first became available on 1 July 1988 and replaced retirement annuity plan
s. Both the individual can contribute as well as their employer. Benefits must be taken between the ages of 50 (soon to change to 55) and 75. Part of the fund (25%) may be taken as a lump sum at retirement.
There are two types of Personal Pension Scheme: Insured Personal Pensions, where each contract will have a set range of investment funds for planholders to choose from (this is not as restrictive as it sounds, as some modern schemes have over 1,000 fund options) and Self-Invested Personal Pensions
(SIPPs).
Insured Personal Pensions with charges capped at a low level are known as Stakeholder Pensions.
An employer can contribute an amount of up to the annual allowance each year, provided that they can demonstrate to the local inspector of taxes that this contribution has been made wholly and exclusively for the purposes of the business. This definition is open to wide interpretation and HMRC have yet to provide any more concrete guidelines.
For 2010 in the UK, higher-rate taxpayers will be able to obtain up to 60% relief on pension contributions this year. If you earn over £43,875 you will pay tax at 40% this year on part of your income.
An employer's contribution is paid gross and is an allowable expense against income or corporation tax.
The PPS fund itself grows tax-advantageously in that it is not subject to UK Capital Gains Tax. In addition, any income generated by assets within the pension fund (e.g. dividend income from shares) does not suffer any additional tax although the pension fund cannot reclaim any withholding tax already deducted from that income.
of deferring the purchase of income benefits. On crystallisation, a pension commencement lump sum (PCLS), also known as tax-free cash, of up to 25% of the fund can be taken. The remainder can be used to provide a taxable income either directly from the fund (called Unsecured Pension (USP), and has previously been called income drawdown or pension fund withdrawal), or by exchanging the fund for a secured pension income through the purchase of an annuity.
One of the most attractive benefits of taking USP as opposed to annuity purchase is the ability to bequeath or pass on the value of one's pension fund in some form. There is also the possibility of further capital and income growth in this part of retirement, although there are corresponding risks, and the Financial Services Authority
(FSA) suggests that one should take independent financial advice
both prior to entering into a USP arrangement and regularly throughout.
A new option for post 75-year olds, called Alternatively Secured Pension (ASP), was introduced. This was still to allow the value of one's fund to pass onto the next generation on death, although only into one's dependents' pension funds rather than as cash and only subject to possible inheritance tax (IHT) charges.
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
tax-privileged individual investment vehicle, with the primary purpose of building a capital sum to provide retirement benefits, although it may also be used to provide death benefits.
These plans first became available on 1 July 1988 and replaced retirement annuity plan
Retirement annuity plan
A retirement annuity plan is a UK pension plan designed to build a lump sum for retirement. Part of the lump sum must be used to buy an annuity and part can be taken a tax free lump sum....
s. Both the individual can contribute as well as their employer. Benefits must be taken between the ages of 50 (soon to change to 55) and 75. Part of the fund (25%) may be taken as a lump sum at retirement.
There are two types of Personal Pension Scheme: Insured Personal Pensions, where each contract will have a set range of investment funds for planholders to choose from (this is not as restrictive as it sounds, as some modern schemes have over 1,000 fund options) and Self-Invested Personal Pensions
Self-invested personal pension
A Self-Invested Personal Pension is the name given to the 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 ....
(SIPPs).
Insured Personal Pensions with charges capped at a low level are known as Stakeholder Pensions.
Contributions
Contributions to a PPS can be made either from the individual or from an employer. An individual can, each year, put in an amount up to the lower of 100% of their earned income or the prevailing annual allowance. The annual allowance for tax year 2008/09 was £235,000 it has reduced to £50,000 for the tax year 2011/12. It is worth noting that an individual can in fact put in higher amounts if they wanted to, but would not be allowed to claim tax relief on the surplus. At the other end, low or non earners are allowed to contribute £3,600 per year.An employer can contribute an amount of up to the annual allowance each year, provided that they can demonstrate to the local inspector of taxes that this contribution has been made wholly and exclusively for the purposes of the business. This definition is open to wide interpretation and HMRC have yet to provide any more concrete guidelines.
Tax treatment
Personal contributions receive basic rate tax relief at source claimed by the provider. That is: a basic-rate taxpayer's contribution of £80 will be grossed up to £100 on payment to the provider. Higher-rate taxpayers can claim additional relief through their tax return. In this example, they would be able to claim back £20, so they would have effectively paid out only £60.For 2010 in the UK, higher-rate taxpayers will be able to obtain up to 60% relief on pension contributions this year. If you earn over £43,875 you will pay tax at 40% this year on part of your income.
An employer's contribution is paid gross and is an allowable expense against income or corporation tax.
The PPS fund itself grows tax-advantageously in that it is not subject to UK Capital Gains Tax. In addition, any income generated by assets within the pension fund (e.g. dividend income from shares) does not suffer any additional tax although the pension fund cannot reclaim any withholding tax already deducted from that income.
Taking retirement benefits
The PPS can be crystallised, or vested, that is used to provide benefits, from age 55 (up from 50 prior to 6 April 2010). A PPS must be crystallised by the age of 75, minimising problems from the mortality dragMortality drag
Mortality drag is a term used, in reference to lifetime annuities, to describe a negative impact that is experienced when an annuity purchase is delayed on a fund from which regular withdrawals are being taken by an individual. It is the increasing risk of falling annuity rates, and grows...
of deferring the purchase of income benefits. On crystallisation, a pension commencement lump sum (PCLS), also known as tax-free cash, of up to 25% of the fund can be taken. The remainder can be used to provide a taxable income either directly from the fund (called Unsecured Pension (USP), and has previously been called income drawdown or pension fund withdrawal), or by exchanging the fund for a secured pension income through the purchase of an annuity.
One of the most attractive benefits of taking USP as opposed to annuity purchase is the ability to bequeath or pass on the value of one's pension fund in some form. There is also the possibility of further capital and income growth in this part of retirement, although there are corresponding risks, and the Financial Services Authority
Financial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
(FSA) suggests that one should take independent financial advice
Independent Financial Adviser
Independent Financial Advisers or IFAs are professionals who offer independent advice on financial matters to their clients and recommend suitable financial products from the whole of the market...
both prior to entering into a USP arrangement and regularly throughout.
A new option for post 75-year olds, called Alternatively Secured Pension (ASP), was introduced. This was still to allow the value of one's fund to pass onto the next generation on death, although only into one's dependents' pension funds rather than as cash and only subject to possible inheritance tax (IHT) charges.
See also
- PensionPensionIn general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
s - Income taxIncome taxAn income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
- Collective investment schemeCollective investment schemeA collective investment scheme is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group...
s - Self-invested personal pensionSelf-invested personal pensionA Self-Invested Personal Pension is the name given to the 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 ....
- Pension simplificationPension simplificationPension tax simplification, often simply referred to as "pension simplification" and taking effect from A-day in 6 April 2006 was a policy announced in 2004 by the Labour government to rationalise the British tax system as applied to pension schemes...
- Stakeholder pension schemeStakeholder pension schemeStakeholder pension schemes were introduced in the UK on the 6th April in 2001 to encourage more long-term saving for retirement, particularly among those on low to moderate earnings. They are required to meet a number of conditions set out in legislation, including a cap on charges, low minimum...