Description
Personal Pension Plans (PPPs) were
originally designed for the millions of employed & self-employed
individuals who did not have access to a company pension scheme.
Introduced in July 1988, they were part of a government push to
extend pension choice & encourage those people not in company
schemes to build up a retirement fund; one that could cater for their
retirement needs more realistically than the state. Many financial
institutions offer PPPs, though most are run by the large insurance
companies and banks.
We can research the Whole market on your behalf to find a suitable
Pension plan, it may be that a PPP meets your needs for retirement
provision. Following the recent sweeping changes made on the 6th April
2006 to pension legislation (see section on Pension simplification)
these contracts are very flexible and can allow contributions to be
made of up to 100% of your earnings. Furthermore these plans can be set
up for non-working spouses and even children and grandchildren where up
to £3600 can be invested annually. (The annual allowance and Lifetime
allowance applies)
How they work
Unlike some company schemes, all personal pensions work on a ‘money
purchase’ basis. This means that the money you save each month or each
year into your Personal pension plan is invested (typically in
investment funds) and is then used at retirement to provide you with
pension benefits. So in theory the more you save the better your
pension should be at retirement.
At Retirement
On reaching retirement, you use the money that has built up in your
personal pension to purchase pension benefits, these benefits can be
taken in the form of either income or income with a tax free lump sum
(The Pension Commencement lump sum). Or the benefits can be transferred
to another type of plan which provides unsecured pension benefits (see
section on Income Drawdown / Pension Fund Withdrawal), these types of
plan allow additional flexibility in that pension benefits can
be drawn whilst your pension fund remains invested.
The value of your pension at retirement is mainly dependent upon:
* How much money you've paid in over the life of the plan
* How well the money has grown
* The annuity rate that the provider applies to your pension fund (if you choose to take an annuity)
* level of Pension Commencement lump sum taken. (Up to a maximum of 25% of your pension fund can be drawn as capital)
So a Personal Pension Plan is really just a long term savings plan
(albeit a very tax efficient one) that is designed to produce a fund at
retirement.
At retirement provision can be made to protect your pension from the
eroding effects of inflation, protect your income in the event of your
death and make provision for your spouse or dependants. (see the
Annuities page). Benefits can currently be drawn from age 50 onwards
(age 55 from 2010 onwards). Whole of life policies are designed to provide life assurance coverage
for an individual's whole life, rather than a specified term. They
contain a savings component, the idea of which is to build up a fund in
the early years which will subsidise the life assurance cost in the
later years. A fixed death benefit is paid to the beneficiary, this is
either the sum assured or the value of the investment pot, whichever is
the greater.
Premiums are usually fixed for the first 10 years of the policy, and
each 5 years thereafter, after which the policy is reviewed and the
premiums or the sum assured may need to be amended depending upon
investment returns. Management fees also eat up a portion of the
premiums.
Whole of life policies can be useful for some people to provide for an inheritance tax liability.
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