How Personal Pensions Schemes Work
While your boss sets up the workplace pension plan, you’re in charge of setting up a personal pension plan for yourself. When you launch the personal pension scheme, you’re offered a variety of pension fund choices. Pension funds are usually under the management of professional money managers, who typically invest your pension savings in several asset funds.
When you’ve set up the pension plan, you can then start making frequent contributions and one-off payments. Your lender will then claim some tax relief from the state and include it to your pension scheme.
And the best part?
Upon retirement, as long as you’re gracefully hit the 55 years mark, you’ll have several options on what to do with the capital in your personal pension fund.
Types of Personal Pension Plans Explained
There are typically three types of personal pension schemes on the market”
- The private pensions
- Stakeholder pensions
- Self-invested personal pensions (SIPP1)
These are typically the defined contributions pension scheme, and in terms of complexity, they’re right in between SIPPs and stakeholder pension plans. However, if you choose to contribute to the private pension scheme, you’ll:
- Have the freedom of deciding where your pension savings will be invested – you can select from a range of assets
- Be able to invest for the long-term – you can even decide to invest in a company’s shares. Investing in long-term investments pay off more than when you make low-risk investment decisions
- Have the choice of diversifying your pension fund – you can opt to spread the risk through distributing your cash between a few different funds and enjoy the perks from the variety of investment options
Stakeholder pension schemes are flexible and low-maintenance pension savings that one can withdraw as an individual. Your employer can also provide these pension schemes. The government has, however, set specific standards that all stakeholder pension plans have to meet. These include:
- Enabling low minimum contributions
- Providing cost-free transactions
- Limited costs
- Allowing flexible contributions
- Providing default investment funds
One of the main perks of choosing the stakeholder pension plans is that they need little to no input. They’re often chosen by those who don’t want to worry about the risks involved or administrative decisions.
A potential drawback, however, is that these pension schemes don’t provide you with much control or options when it comes to the investment portfolio.
Self-Invested Personal Pensions (SIPPs)
A self-invested personal pension is a more ‘hands-on ‘pension plan, and it offers consumers a higher degree of options on what kind of assets you want to invest your pension pot in.
SIPPs also enables you to design your own portfolio of assets which includes:
- Unit Trusts
- Real estate
- Mutual funds
Nonetheless, the price of the additional freedom you have is the time consumption and effort you’ll need to put into handling and managing your pension savings.
If you’re not particular about the best personal pensions scheme to choose, be sure to consider getting professional pension advice from a private pensions advisor. They’ll walk you through all the pros and cons and help you choose the pension plan that’s ideal for you.
Tax Relief on Personal Pensions
When you start making regular contributions to your personal pension scheme, your pension provider will claim some tax relief on your behalf to the government and include it in your pension pot. Most pension providers will add your 25% tax top-up to your pension savings balance automatically.
Let me explain:
For instance, if you contribute €200 to your pension scheme, you’ll receive an extra €25 as the tax relief. Therefore, you’ll have a total of €225 invested in your personal pension fund. If you’re on a higher rate, you’ll claim an extra 25% tax top-up through your tax return, or 31% if you’re in the top rate taxpayer band2.
For the 2020/21 financial year, you receive tax relief of up to 100% of your income or €40,000. It depends on which one qualifies as the lower amount).
Who Needs A Personal Pension?
Workplace and personal pension schemes can supplement any capital you might get from the state pension, which is currently set at a maximum of €9,120 per year.
Under the Auto Enrolment scheme, your boss is obliged to offer you a workplace pension and contribute employer contributions, thus effectively adding cash into your pension fund for free. It means that the workplace pension is a lucrative pension deal that any employee should consider.
Nonetheless, you might opt to contribute to both the workplace and personal pension scheme. If you don’t, however, have the workplace pension, perhaps since you opted out or you’re your own boss now, setting up a personal pension scheme could then be your best bet.
Got Questions? Check These First
Is the Personal Pension Plan the Same As A Work Pension?
Well, personal pension plans are a type of defined contributions plans. They’re typically individual contracts between one and their pension provider, and you establish them.
Workplace pensions, on the other hand, are set up by an employer, on behalf of his or her employees. According to the law, an employer should ensure that every staff member has a workplace pension and pay into the workplace pension plan on their behalf.
What’s A Personal Pension Plan?
A personal pension is a retirement fund that you set up by yourself. It’s sometimes referred to as the defined contributions scheme or money purchase pension plan. Some bosses also provide a personal pension in the form of workplace pensions.
The capital you contribute to the private pension plan is then placed in various asset investments like shares and bonds by the pension provider.
Is A Personal Pension Plan Worth It?
Yes, it is. Personal pension schemes are typically a long-term savings scheme that comes with the added advantage of tax relief. The pension provider claims tax relief from the state and then automatically includes the 25% tax top-up into your pension pot.
How Much Can You Pay into Your Personal Pension Scheme?
Well, as per the current financial year, one can pay up to 100% of their income into their pension plan every year. Or up to the yearly allowance of €40,000. It means that the total amount of any personal pension contributions, employer contributions, and the state tax relief received, can’t surpass the €40,000 yearly pension allowance.
So give it a go.
Personal Pension Scheme is a government initiative to make it easier for people to save money and get tax relief on their contributions. The scheme has been in place since April 6th, 2006, and the latest changes are due from next year onwards. If you’re not currently saving enough for retirement or managing your pension pot well, then this could be an excellent option for you.