Personal Pension Schemes

Personal Pension schemes can be operated by any pension provider. The most common pension savings scheme providers are high street banks and building societies or pension trust managers. The pension scheme providers are responsible for managing contributions from pension scheme members and managing the investments that are made using these contributions. It is important that each individual pension is handled with some individual care, so that investments made take into account the amount of money the saver is investing and the saver's age. You may choose to invest in a personal pension if:

• you are self-employed
• you are offered a personal pension scheme by your employer
• you wish to invest in a personal pension in addition to an occupational pension (see Occupational Pensions) you already have
• you do not have the option of an occupational pension scheme
• you do not want to invest in the occupational pension scheme you have been offered
• you are not working but wish to begin saving for retirement
• you want to set up a pension scheme for someone else, perhaps your child

Personal pensions are known as money purchase schemes. You contribute money to the scheme which creates a fund; the money is invested and any investment returns are added to your fund. Your pension scheme provider will also claim tax relief on the contributions you make: every contribution is seen as a 'net' contribution, and tax relief of 22% is claimed to recover the 'gross' value. This means you need only contribute £78 for £100 to be credited to your pension fund. If you are a higher rate taxpayer, paying 40% tax, you can claim a further 18% tax relief through your tax return at the end of the year; for more information see Tax Relief. Upon reaching retirement your provider will use the pension fund to pay you an annual pension or use the fund to secure an annual pension from an insurance company. The insurance company may be recommended by your pension savings scheme provider, or you may wish to do independent research as to whom you sell your pension fund for a retirement income.

Although the money that you contribute to your pension is invested, you do not normally have to worry about making big losses. Your pension scheme provider should not invest any pension contributions in high-risk situations, and any investments at moderate risk will be carefully managed to ensure that the closer a pension saver comes to retirement, the lower the risk to their investments. This may mean that for a time your contributions are invested in the stock market at a moderate risk, but later your pension fund is invested in government bonds known as gilts. Gilts are essentially certificates of investment or 'loans' to the government, issued by the Treasury, which are guaranteed by the government and offer fixed rates of interest with minimal risk: they are thus very secure investments. You may be offered the chance to decide exactly how you would like your pension fund to be invested, down to choosing the individual stocks: remember to take advice from an independent financial advisor before risking your savings. For more details on investment see Other Investment Opportunities. Remember, wherever investment is involved there is always a risk; you should be aware that there is always a possibility that the worst could happen, and not rely on one savings fund to protect you from poverty in retirement.

Money purchase schemes work in much the same way as a standard savings account, as far as the saver is concerned. You contribute money which builds to a savings fund and earns interest; this fund is used when you reach retirement to provide you with retirement income. The difference is that the interest is earned from investment returns rather than being guaranteed by a bank or building society. You may be offered a choice of investments for your pension fund, or be offered a standard investment package recommended by your scheme provider. Your pension scheme provider should be able to advise you on the best investment portfolio for your needs.

When you come to retire, you will be able to use the pension fund you have built up from contributions and investment returns to buy an annual pension, or annuity (see Annuities). This is why these schemes are known as money purchase schemes: you use your money to buy the guarantee of a certain amount of money each year. The amount of money you are entitled to will depend on

• how much you have contributed to the scheme
• how successful the investment of these contributions is
• how much you have to pay in charges to the scheme provider
• the annuity rate which is used to calculate your pension on retirement

You will usually be offered the chance to take a percentage of your final pension fund as a tax-free lump sum. Many schemes offer a lump sum of twenty-five percent of your fund on retirement. The exact amount will however depend on the specific terms and conditions of your pension scheme contract.

These personal pension schemes are often referred to as defined contribution schemes, because the amount of money you invest in your fund each year is usually defined in the scheme contract you sign, and the amount of money you receive remains undefined until you reach retirement. Defined contribution schemes will often offer you a lifetime annuity, which you may be able to move to another insurance company at a later date if you are offered a better deal for doing so. For more information see Claiming your Non-State Pension.

If you have a very low income or are worried about losing your job, it may be inadvisable to begin investing in a private pension, because the money you invest will be inaccessible to you until you reach retirement age. This is a useful way of ensuring you will have money when you retire, because there is no way to spend it. However, if you have a low income or you lose your job and find you need to access your savings, you will not be able to access the money in your pension fund. If you feel you are at high risk of needing your savings fast in an emergency and you do not earn enough to save for a pension and create a separate contingency fund to finance unexpected costs, you should think carefully before you invest your money in a pension scheme for the long-term.

You can invest in a personal pension at most high street banks and building societies. If you are uncertain which scheme provider you should choose, it is a good idea to begin by getting advice from the financial advisor at your current bank. Although they will be hoping to persuade you to choose one of the bank's own products they will be able to explain the terms and conditions of their personal pension schemes and explain the advantages for you. They will also be able to advise you based on your individual finances, using information from the bank accounts you have with them. For more advice you can search for pension comparison sites on the internet, or contact your local Citizens Advice Bureau.