Building up a Pension Fund

Why should I set up a Pension?

• Pension fund contributions enjoy tax relief at up to 40% (subject to HM Revenue & Customs limits).
  
  If basic rate tax is 20% and you pay £160 into your pension plan, HMRC will add £40 to your contribution, so the total invested is £200. This is known as basic rate tax relief.
  
  If you’re a higher rate taxpayer, the payments made into your plan will only be increased by basic rate tax relief, but you will be able to claim higher rate tax relief on your annual self-assessment tax return.

• Once the contributions are held within the pension fund they cannot be accessed until your 50th birthday (55th birthday as from April 2010).
  
  If your intention is to save for your retirement then the fact that you cannot access your pension fund before age 50 or 55 means that those funds will most probably be used for their intended purpose.

• At retirement, up to 25% of your pension fund can be taken as tax-free cash and the remainder must be used to provide you with a retirement income.

• If you die before you begin taking the benefits from your pension the funds will normally be passed to your spouse, or other chosen beneficiary, free of inheritance tax.

Personal Pensions

Depending on your circumstances, objectives and risk profile, there are three main ways to build up a Personal Pension.

• Stakeholder Pension Plan (SHP)
• Personal Pension Plan (PPP)
• Self Invested Pension Plan (SIPP)

You may also be entitled to join an Occupational Pension Scheme provided by your employer. These tend to be generous schemes and should always be considered before setting up one of the Personal Pensions listed above.