A Personal Pension plan is also an individual money purchase scheme, but unlike a stakeholder it is not subject to the same strict charging criteria, although there are a number of Personal Pension plans on the market that offer ‘stakeholder friendly’ terms. However, unlike a Stakeholder plan, the providers of Personal Pension plans reserve the right to amend the charging structure in respect of their plans in the future if they so wish.
This investment is intended as a long-term investment and under current HM Revenue & Customs’ practice it is not normally possible to access the fund(s) prior to the age of 55. The minimum age will increase to 57 from 2028 with further increases as State Pension Age goes up. At retirement, up to 25% of the fund can be taken as a tax free cash sum with the balance being used to purchase a pension which would be taxed as earned income.
Pension Scheme Eligibility
An individual can now contribute to a UK registered scheme whether they are resident in the UK or not. However, tax relief on contributions will only be available to a ‘relevant UK individual.’ This is an individual who is under age 75 and who:
- has relevant UK earnings chargeable to income tax for that tax year, or
- is resident in the UK during that tax year, or
- has for that tax year general earnings from overseas Crown employment subject to UK tax; or
- was resident in the UK at some time during the five tax years immediately before the tax year in question and they were also resident in the UK when they joined the pension scheme
You may contribute to as many pension plans as you want and there is no upper limit on the total contribution that can be paid. Subject to your available annual allowance not being exceeded, however, (see below) the limit on the amount of personal contribution that can benefit from tax relief is the greater of £3,600 and 100% of your ‘relevant UK earnings’. ‘Relevant UK earnings’ would include things like self-employed profits, salary, wages, bonuses, overtime and commission. However, unearned income – such as investment income and savings income – and dividends and pension income do not qualify as ‘relevant UK earnings’.
Tax relief on your own contributions
Because I am recommending a personal pension any contributions you make to it will be made under Relief at Source. This means that your contributions are paid from your take home pay, net of basic rate tax relief, thus ensuring that you benefit from basic rate relief at source. Any higher rate tax relief to which you are entitled is normally claimed through the self-assessment return. Alternatively, if you don’t complete a self-assessment return, and depending on the size of the contribution, you may be able to arrange with the local tax office to instead obtain the additional higher rate relief for current and future tax year contributions via an adjustment to your PAYE code.
Employer contributions made on behalf of an employee may be paid into an employer sponsored occupational scheme, or an individual contract such as a personal pension.
The amount of employer contributions are unlimited and are not restricted by the earnings of the individual concerned although, in practice, care should be taken to ensure that employer and individual contributions combined do not exceed the individual’s available annual allowance (which may include some ‘unused’ annual allowance that can be carried forward from earlier tax year(s)).