A Personal Pension is a product. It is not an investment but a tax-efficient wrapper within which investments may be held.
It offers compelling tax incentives:
Tax relief on all eligible contributions at your marginal (highest) rate of tax
No income tax or Capital Gains Tax on qualifying investments held
25% of the pension fund may be withdrawn tax-free on or after the age of 55 (rising to 57 from 2028)
Eligible contributions in any financial year are limited to the lower of £40,000 or 100% of earned income. These limits are reduced for high earners (£150,000 or more of “adjusted income”). Contributions of up to £3,600 per annum are eligible for all (even those with no income at all). Unused allowances may be “carried forward” for up to three years.
There is a limit (the “Lifetime Allowance”) on the value of qualifying investments that may be built up in a Personal Pension. This stands at £1 million for 2017/18 but will increase to £1.03 million on 6th April 2018.
Recent changes in legislation mean that the full value of a pension fund may be accessed from the age of 55. As mentioned above, 25% is tax-free (rising to 57 from 2028). The balance is taxable as income.
Yes, there are complexities, particularly for high earners and for those who have accumulated substantial funds. But for most people the humble Personal Pension offers unrivalled tax incentives:
For a basic rate tax-payer it only costs 80p to invest £1.00
For a higher rate tax-payer it only costs 60p to invest £1.00
The invested £1.00 grows free of tax
From 55 onwards 25p (plus tax-free growth) is available tax-free. The other 75p (plus tax-free growth) is available less income tax, i.e. 60p net to a basic rate tax-payer or 45p to a higher rate tax-payer.
Many individuals who pay higher rates of income tax during their working lives will be basic rate tax-payers in retirement. So they benefit from 40% relief on contributions but only pay an effective tax rate of 15% (75% x 20%) on benefits. The “maths” gets even better if your employer offers a “salary sacrifice” facility (see our “Group Pensions” page).
Other reasons to be cheerful:
Personal Pension funds will usually be outside of your estate for Inheritance Tax purposes
In the event of death before the age of 75 all benefits (income and capital) are payable tax-free to nominated beneficiaries
Pension funds may be passed from generation to generation (irrespective of age at death)
At HDA we have considerable experience of reviewing existing personal pension plans, arranging new personal pension plans and managing investments within personal pension plans (including Self-Invested Personal Pensions (SIPPs)).
For more information please get in touch.