4. PERSONAL PENSIONS
4.1 Introduction
- The self employed.
- Individuals who are not members of company pension schemes, including
those without earnings. Prior to 6th April 2001 it was not possible
for an individual without an earned income to contribute to a personal
pension.
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These policies became available on 1 July 1988, as a consequence
of the Finance (No. 2) Act 1987, now incorporated into the Income
and Corporation Taxes Act 1988, Chapter IV, ss 630-655.
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PPP providers are primarily insurance companies, but they may also
be banks, building societies, friendly societies, licensed deposit
takers, and authorised unit trust companies. The eventual pension,
however, must be provided by an annuity purchased from an authorised
insurance company.
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PPPs may be used to contract out of the State Second Pension (S2P).
This option is only relevant to employees, as self employed people
are not members of S2P in the first place and therefore cannot contract
out.
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These policies operate under 'money purchase' principles, where
the accumulated fund is used to secure retirement benefits.
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Personal pension policies attract substantial tax concessions:
- Tax relief on contributions made by individuals and employers,
within set limits.
- The pension fund is free of taxation on its income and capital
gains except for tax credits on dividends, which can no longer be
reclaimed.
- Part of the fund at retirement may generally be taken as tax free
cash at retirement.
- Death benefits may be provided, free of inheritance tax, for dependants.
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Individuals may choose to have personal pensions from different
providers, provided contribution limits are not exceeded.
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All pension providers must have their particular personal pension
scheme approved by the Inland Revenue Savings, Pensions, Share Schemes
Department (IR SPSS).
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