Pensions

Overview

Cobalt Private Finance provides fully independent advice on personal, stakeholder and group personal pensions (GPPs).

For more information on these areas, click on the relevant link below or call one of our advisers on 0845 330 0809.

What are personal pensions?
Personal pensions are tax efficient, Inland Revenue-approved saving schemes managed by investment companies (technically speaking, they are ‘money purchase schemes’).

Personal pensions are taken out by people who want to save for their retirement but who may not have access to an occupational pension. As with most forms of pension, contributions can be regular or one-off.

Personal pensions may be used to buy a regular income or ‘annuity’ during retirement, which can start between the age of 50 and 75. However, you can also take out a tax-free lump sum on retirement of up to 25% of the value of your fund, although this clearly reduces the size of the annuity.

Importantly, when you retire you do not have to take out an annuity with the company your pension is with but can choose to do so with another provider by exercising your ‘open market option’.

In short, this means you can shop around and compare the annuity rates offered by different providers. Depending on the annuity, the pension can continue to be paid to your spouse or dependants should you die in the early years of your retirement.

What are the tax benefits?
Personal pensions are extremely tax-efficient. Contributions receive basic rate tax relief at source, while any growth within the fund itself, and any income generated (with the exception of dividends earned on UK shares) are free from tax.

Higher rate taxpayers need to claim the additional rebate through their annual tax returns._The pension itself will be treated as earned income and will be taxable. And if you die before you retire, in most cases there will be no inheritance tax on the value of your fund.

How much can you pay into your pension funds each tax year?
You can pay as much as you like into all your registered pension schemes but there will be limits on the amount of tax relief given. You can get tax relief on contributions of up to 100% of your UK earnings if you are a UK taxpayer. Any contributions (including any by your employer) above the annual allowance, which will be £235,000 in tax year 2008/09, will be subject to tax, currently 40%. The annual allowance will increase each year until 2010 when the position will be reviewed.

1. You can contribute to a stakeholder or personal pension in addition to your occupational pension no matter what you earn.
2. How much you contribute to your personal or stakeholder pensions is no longer dependent on your age.
3. If you’re not earning but can contribute to a pension, the maximum you can contribute in each year is £2,808 (made up to £3,600 with basic rate tax relief).

However, there are pension fund limits, i.e. a lifetime allowance that you can accumulate (free of tax) in all the pension funds you have built up.

1. This will be £1.65m for the tax year 2008/09. You will have to pay tax on any excess over the £1.65m allowance. This is set to rise in stages to £1.8m by the tax year 2010/11.
2. Salary-related pension scheme benefits will be given a value that will count towards the £1.65m lifetime allowance.
3. Any amount above the lifetime allowance can be paid as a pension benefit but will be subject to a tax charge, currently up to 55%.

What risks are attached to personal pensions?
With personal pensions, as with most investments, what you receive when you retire is never guaranteed, as almost all pension funds will have exposure to the stockmarket. Fund performance can go down as well as up and interest rates, when you take out an annuity, can work against you.

However, that said, the majority of pension funds are extremely well diversified and structured to reduce risk over the long term. Nevertheless, it is important that you ensure your pension invests in funds that are suited to your risk profile and financial goals.

Importantly, most people move from higher to lower risk investments as they approach retirement to ensure the value of their fund isn’t jeopardized by a sudden stockmarket dip.

What do they cost?
All companies that offer personal pensions will charge you a certain amount for setting up and managing your pension fund. Inevitably, different pension managers will charge different amounts, so it is important that you shop around. That said, charges should not be the sole factor that drives your selection, as the performance track record of the pension manager is also vital.

What if I stop paying into my personal pension?
Many people who take out personal pensions stop paying into them after only a few years. However, doing so can mean you lose a large percentage of the money you have invested due to up-front charges and administration costs.

Is a ‘stakeholder’ pension a type of personal pension?
Yes, it is. Very simply, stakeholder pensions are low-charge and flexible personal pensions. Just because they are low cost does not mean they are the most appropriate pension for you.

Usefully, it is possible to take out a stakeholder pension on behalf of a child. It is always best to seek the advice of an independent adviser before you decide between a personal and stakeholder pension. He or she will be able to talk you through the differences and help you decide which is best for you.

However, it’s worth pointing out that if your employer runs an occupational scheme, it is usually advisable to contribute to that rather than take out a personal or stakeholder pension.