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What is a personal pension plan and what options are available?

Deciding to save for your retirement is one of the most important financial moves you are likely to make in your life. If you are in employment, the odds are that you will already have a workplace pension in place. But don’t necessarily think that it will be enough to sustain you in the lifestyle you’ve become accustomed to when the time comes to retire.

People often either underestimate how much they will need to save to provide the right size of pension pot, or because retirement seems a long way away, they keep on putting off the decision to take action. These are not traps you want to fall into.

A personal pension plan is a savings vehicle that will provide the extra finance you need in retirement. It is a kind of defined contribution pension. You get to choose the pension provider and set up arrangements for the contributions that will be paid into your plan.

About personal pension plan tax relief

A personal pension plan is a tax-efficient method of saving for your retirement. The contributions you make will be invested to accumulate a pot of money that you can access once you’ve given up work. Your payments will be subject to personal pension plan tax relief. In other words, the tax you would ordinarily pay to the government is instead paid into your pension.

In the main, money invested in your personal pension plan will grow tax-free, and when you decide to withdraw all or part of your pension pot when you are 55 or over, you will, in all likelihood, be able to remove 25% without having to pay tax.

It’s important to fully understand the personal pension plan rules. A good place to start is the Personal Pensions page on the GOV.UK website.

Who needs a personal pension plan?

Personal pensions are attractive to people from all walks of life. It’s worth considering taking one out if:

  • You are self-employed.
  • You only have your state pension to fall back on.
  • If your income is somewhat unsteady, you need to take time off for things like bringing up your children or looking after others.

It’s worth bearing in mind that you don’t have to be in paid employment to contribute to a personal pension plan and claim tax relief. It’s even possible for you to create and pay into a pension scheme on behalf of your children or grandchildren.

Whatever you do, though, don’t underestimate the benefit of an existing workplace pension. 

It may be that your workplace scheme includes what is known as a buyout policy. It enables you to transfer the pot you have built up within a workplace pension across to a personal pension scheme. 

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However, the fact that your employer may match your contributions makes workplace pensions excellent value for money. But even so, you may still need a personal pension plan to supplement a workplace scheme.

What personal pension plan options are there?

There are several personal pension plan options of which you need to be aware. They include:

  • The Ordinary Personal Pension – This type of pension is available from most of the larger pension providers. In most instances, they provide you with a variety of investment options.
  • The Stakeholder Pension – This type of personal pension plan is useful because you are able to make low, minimum contributions. Another useful factor is that donations can be stopped and started according to prevailing lifestyle circumstances. As well as annual charges being capped, money invested can be transferred to other vehicles free of charge.
  • The SIPP Personal Pension Plan Option – The initials SIP. Stand for “Self Invested Personal Pensions.” This type of pension scheme offers a wider choice of investment options than ordinary or stakeholder pensions. However, a self invested personal pension plan requires personal hands-on management. It is not ideally suited to investment novices.

Before you take the plunge, you should consider the various personal pension plan options open to you. To undertake a personal pension plan comparison, it might benefit you to seek professional advice.

How a personal pension plan works

The way a personal pension plan works is by you choosing a pension provider and then deciding on the contributions you will make. People often contribute on a monthly basis, although some pension providers may allow you to pay in a lump sum as and when you have the funds available to do so.

Pension providers will offer you a limited choice of funds in which to invest. The aim is to grow the fund in the years leading up to your retirement. Any contributions you make will attract tax relief, and your pot will in the main grow tax-free. The size of your final pot is dependent upon:

  • The period over which you save
  • The size of your contributions
  • How the investments have performed
  • Any charges that your pension provider has deducted

How much should you invest in a personal pension plan?

When it comes to the question of how much you should invest in a personal pension plan, the answer varies from person to person. It depends on the age of the person and their individual financial circumstances.

If you have an idea of the amount of money you would like to have access to in your retirement, there are online tools you can use to determine how much you should be investing, like the Moneyfarm pension calculator.

The good thing about these tools is that they allow you to play around with figures without any commitment. However, please bear in mind that the answers these calculators give you are estimates for guidance only.

Which are the best personal pension plans?

Choosing the best type of personal pension plan or making a personal pension plan comparison is no easy thing to do. You might, for example, be interested in ethical personal pension plans. If you are, you may like to consider the top 6 ethical pension funds for 2021, as discussed on the good-with-money.com website.

Unfortunately, there are a lot of unscrupulous individuals and websites around operating scams to part you from your money and ruin your chances of an easy retirement. In order to avoid these, it’s worth paying a visit to the Citizens Advice website and reading their “Choosing a Personal Pension” page. You can also pick up some of their tips for choosing the right personal pension scheme.

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