Visit our sponsor.
Personal Pension Plans (PPP) were introduced in July 1988 as a replacement for the Retirement Annuity contract.
Personal Pension Plans (PPP) are mainly individual contracts, but sometimes Group schemes are set up by companies who would not otherwise offer a pension scheme.
You are eligible to invest, ( and also qualify for Pension Term Assurance) if you are self employed or employed but not in an employers scheme, ( unless it is a Group PPP).
IMPORTANT NOTE Pension providers must confirm every five years that you are still eligible for a contract. You must reply to this or risk having the contract suspended and time being wasted . At best this will lead to missed investment, at worst it could lead to policy termination or erosion through high charges. This is an Inland Revenue requirement and they are bound by the rules. If you have changed addresses you should make sure that the pension company knows.
WARNING. If there is an employers scheme and you are wondering whether to join, or run your own Personal Pension Plan, you should almost certainly join the company scheme. If you are in the company scheme and thinking about leaving, you should almost certainly stay in.
In principle the concept is simple. You invest, getting tax relief on your premium, and the fund grows tax exempt. When you retire ( any age from 50 to 75, earlier for some special occupations with a short life, e.g. dancers ), you get 25% of the fund as tax free cash, and the rest buys a pension.
In fact you do not have to retire to take benefits, but in practice most people do - they do not save enough for any other course of action - see Pension Audit and the Single and Monthly Premium Calculator. There are no limits on the final benefits, only on the amount invested, ( which depends upon your age ). The percentage is of "net relevant earnings" which normally relates to taxable income, ( though the situation is more complex for those with multiple sources of income). The Earnings Cap of £90,600 for 1999/2000 (£87600pa for 98/9), but if this affects you and you have an old Retirement Annuity, all is not lost.
If you have not made maximum contributions in past years you can catch up, with very large premiums, by going back up to 6 years and using old allowances. Ask your IFA about Carry Back and Carry Forward.
Waiver of premium - protect yourself.
| Personal Pension Plan contribution limits | |
|---|---|
| Age at start of tax year | % Net Relevant Earnings* |
| 35 or less | 17.5% |
| 36-45 | 20% |
| 46-50 | 25% |
| 51-55 | 30% |
| 56-60 | 35% |
| 61-75 | 40% |
*Net Relevant Earnings are broadly speaking your income from work. For employees it can
include the value of company cars and fringe benefits, overtime etc. It excludes income
from investments.
Use this quick little JavaScript** to see how much you can contribute to your policy, and
the Net Premium as determined by your tax rate, and then see how your position stacks up
overall with the Pensions Audit.
You can take advantage of unused relief in previous years by using the "carry
back" and "carry forward" facility offered by the Inland Revenue. ( This is
of particular benefit to those investing lump sums, but only applies once the current
years allowance has been exceeded. Take advice ).
There is a temptation to buy multiple contracts from different companies. Avoid this unless contributing at least £100pm to each, as policy charges on small premiums can be significant.
Contracts themselves vary a lot. A contract that is good for a long term high premium case may not be suitable for a short term one. ( The difference between high and low cost contracts can be over 30% in the final fund). Seek independent advice.
Performance is the great red herring. There is no evidence whatsoever that any company can reliably outperform its competition in the major world markets, ( and most people don't put their pension money into technology funds or Mexico ). Arguments that expensive charges are compensated for by good performance are sophist, as the charges are predictable, the performance is not.
For the record the analysis of contract charges and performance is my business, an area in which I am one of very few UK experts who do not work for an insurance company. I invented the Pensions Analyser package used by many IFAs and some pension providers. IFAs and pension provider marketing people who have not seen this package should contact me, it really is rather good.