Personal Pensions
What is a personal pension?
A personal pension is a type of pension that isn't linked to your employer or occupation. So it's really a pension you do off your own back. You can go and choose from the whole market as to which pension provider you want to use. It offers a lot of flexibility. But again, it's not linked to your employer, so your employer won't necessarily be putting money in on your behalf.
How is a personal pension calculated?
A personal pension is very much like a money purchase occupational pension. You can put money into a pot that gets invested while you're working. In most cases it gets invested in stock markets. When you eventually retire, that money has hopefully grown into a nice big pot that you can convert into an income. The most common way to buy an income is to use what's called an annuity. You swap your lump sum pension for an income with an annuity provider, and they give you a pension for life.
What is a stakeholder pension?
Stakeholder pensions are really just a type of personal pension. The key two points are, one they are cheap because there is a cap on charges. Stakeholder pensions can not have any initial charges or exit charges the only one being a one and half percent annual fee. And that after ten years even that has to fall to one percent. So they are very cheap. The other good thing is that you can actually put money into a stakeholder pension and get some money back from the government, even if you do not pay tax. And the way this works is for every seventy eight pounds you out in, the government tops it off by twenty two pounds to make it one hundred pounds. So it really is something for nothing. The only caviat being, you can not put more than three thousand six hundred pounds in gross each tax year. So you can basically put in up to two thousand eight hundred and eight, and the government will top it off for you, even if you do not pay tax, to three thousand six hundred.
How is a stakeholder pension calculated?
Stakeholder pension is identical to personal pensions in this respect. The similarities are that you put money into a fund, and it gets invested for a number of years until you retire. Then when you do retire, that fund's used to buy a pension income, which typically is called an annuity. Which means your swapping your funds with an annuity provider in turn for an income for life.
How do I buy a stakeholder pension?
Stakeholder pensions are widely available. You can buy them from banks, even super markets these day. There's a lot on the market. It's quite easy to find them. The key is to actually choose a good one from bads. The good thing is they're quite standardized, so you can't really make a big mistake. But some stakeholder providers have better investment options than others, maybe better funds or a wider range of funds in terms of where you can invest the money. It's really worth looking for someone who offers a good range of investments.
What is a deposit-based policy?
When you have a personal estate called a pension, you obviously need to choose where to invest the money. One of the simple options is cash. Most people would refer to it as deposits. Very simply, it's safe and you can't lose money. But the problem is that if you invest in cash over twenty or thirty years, you generally don't get very exciting returns. You often would have done better had you invested in stock markets. So, what tends to make sense is you tend to invest in riskier areas to start with. And, when you're approaching retirement, maybe you've got a few years to go, it's often sensible to move into cash and simply to protect yourself from any loss of any stock market crash.
What happens to my personal pension if I retire due to ill-health?
If you have to retire due to ill-health, you can normally take your pension early. What that would mean is, the pension is paid out as a lump sum, and you then, obviously, are buying the annuity. Because you often have a lesser life expectancy, you should get a higher annuity rate, even though you're somewhat younger than you would have been than when you'd normally retire. It actually means that, if your life expectancy is less than a year, you can have the whole pension as a single lump sum at that time.
What happens to my personal pension if my job changes?
Personal and state pensions are totally totally independent from employers. You can keep them throughout your career. What you might find is during one new job your employer might offer you a scheme you might want to join. You may choose to stop paying into your existing scheme, it can stay there and maybe eventually you want to continue put more money into them at a later date.
Will my pension always be secure?
One of the big advantages of personal pensions is the money is totally ring fenced from the pension companies so in no circumstances whatsoever can they actually get their hands on it. So that really means it is safe. Obviously, it is not safe from stock market failures. If the money is invested in the stock markets and the markets crash, you can lose money. But no one else can actually get their hands on your pension so it is very safe from that point of view.
What is the maximum proportion of my pension I can take as a tax-free lump sum?
For all personal pensions and stakeholder pensions, you can take up to 25 percent of that entire pension pot when you retire. The good news is that it's tax free.