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  Flexibility for Members   "More flexibility for individuals
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There is greater funding flexibility for individuals with personal pensions as a result of A-Day. With high lifetime and annual contribution limits it is possible
to invest 100% of earnings and receive
tax relief, allowing people approaching retirement to build-up their pension fund, take tax free cash and an annuity.
  Introduction   Plan contributions   Contracting out
  Relief from previous years   Protection benefits   Investing contributions
  Delaying final retirement      

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For self employed individuals or where an employer does not have an occupational pension scheme they must establish a private pension scheme. This also applies where an individual is not eligible to join their employers pension scheme or wants to make additional contributions independent of the employer. A private pension will be a defined contribution scheme and usually offered to employees as a group personal pension (GPP) or since 6 April 2001 a group stakeholder pension also known as an insured personal pension. Pension Simplification has resulted in higher contribution limits to these schemes allowing greater flexibility for members to significantly build-up their pension fund just as they are nearing their retirement date.

An insured personal pension is where a life insurance company manages the assets and where the Financial Services Authority (FSA) must authorise the fund managers. This arrangement will include private managed funds (PMFs) but will not apply to self invested pension arrangements such as self invested personal pensions (SIPPs) where the investment decisions are the responsibility of the member.

For money purchase schemes the fund value will determine the pension income at retirement age and this is dependent on contributions made and the investment return. The contributions made will usually be wholly by the scheme member although occasionally an employer will make a percentage contribution.

Plan contributions
Since Pension Simplification from 6 April 2006 the amount of retirement benefits from a money purchase scheme is limited to the Lifetime Allowance which is a total fund of £1.5 million in 2006/07. In terms of contributions the member is limited to the Annual Allowance which was £215,000 in 2006/07.

Tax relief on the contributions is limited to 100% of relevant earnings for exempt approved schemes, resulting in a difference between gross and net contributions. For a basic rate taxpayer there will be a tax rebate of currently 20.0% for the 2009/10 tax year on gross contributions made. For a higher rate taxpayer a tax rebate of currently 40.0% is given although for a personal pension part of this must be claimed through their self assessment. The scheme member will be able to make regular and single contributions to a personal pension and stakeholder pensions during the tax year and this flexibility is particularly beneficial to the self employed.

A stakeholder pension limits the contributions to £3,600 per annum irrespective of age or pensionable earnings where tax relief is given at source. An individual can also establish SIPPs that allow a wider investment choice. As an occupational pension scheme member, the individual can make private payments to a free standing additional voluntary contribution scheme (FSAVC) that is separate from the employers occupational scheme but they will still be limited to total contributions payments of 15.0% of net relevant earnings (NRE) as set by the Inland Revenue and this includes all pension arrangements.

Previous to A-Day the contributions to a personal pension were limited by Inland Revenue (now HM Revenue & Customs) maximums based on the members age and ranging from 17.5% for individuals aged 35 or less up to 40.0% for individuals aged 61 or above, being scaled between these limits.

Contracting out
This is a personal pension plan that an individual can use for contracting out of the state earnings related pension scheme (SERPS). This plan will build-up benefits where the pension income at retirement will be dependent on the contributions made and investment return.

An early leaver with a deferred pension can use a buyout policy to transfer from an occupational pension scheme. Under the Finance Act 1981, an employee can take out a deferred annuity policy through an insurance company. The annuity must match the guaranteed minimum pension (GMP) if the occupational scheme is contracted out of the SERPS.

Relief from previous years
Unlike a personal pension from 31 January 2002, retirement annuity policies (RAPs) can still be used for carry back relief. This means an individual can make a contribution in the immediately proceeding tax year and that contribution will attract tax relief at the individuals marginal tax rate in that tax year.

The total contribution cannot exceed NRE for the previous year. The carry back contribution cannot exceed the unused tax relief for that year, the maximum being based on the individuals age as at the start of that tax year and their net relevant earnings in that tax year.

As from 6 April 2001 the carry back relief for a personal pension and stakeholder pensions will only apply if contributions are received by 31 January of the current tax year. Carry forward relief in respect of personal pensions was abolished from 6 April 2001. Carry forward can still apply to RAPs and will allow members of these policies to make contributions in excess of the normal maximum for their current tax year while using any unused relief from previous tax years. There are a number of conditions namely that;

The RAP scheme member must use the maximum contribution for the current tax year before using carry forward;
The scheme member has net relevant earnings in the carry forward tax year; any unused relief, starting with the earliest year of the previous six years can be carried forward;
The amount of unused relief for carry forward is calculated using the maximum allowances and percentage, based on the members age, of NRE for each of the previous six years;
The tax relief is limited to the available contributions up to the level of taxable earnings in the current tax year.

Protection benefits
The rules applying to personal pensions or retirement annuity policies allow pension linked term assurance to be incorporated within the premiums paid into these schemes. There is a limit to the proportion allocated to purchasing term assurance, however members can claim tax relief at their highest rate on the premiums paid.

In the event of a critical illness or accident of a personal pension scheme member, waiver of premium benefit will allow a regular contribution by the member or employer to continue to retirement age. Payments from an income protection contact will not qualify as taxable earnings so it would not be possible to continue paying into a personal pension right through to retirement age. Waiver of premium means the provider waives the regular contributions, usually after a deferred period. Waiver of premium benefit will not be available for policies started from 6 April 2001 with the introduction of stakeholder pensions.

Investing contributions
A pension fund represents a members pension rights accrued within a money purchase scheme. This could be a personal pension or an occupational money purchase scheme. The pension fund value will depend on the contributions made and investment return in contrast to an employers occupational final salary pension does not have an actual fund value as a members retirement benefits are based on the years of service and accrual rate of the scheme.

The rate of growth in the pension fund value will be influenced by the charges levied by the provider that includes both an administration and a fund management charge. The charge is expressed as an annual percentage, usually between 0.4% for large investments in low risk funds to 1.0% for stakeholder pensions and up to 1.75% for a portfolio of higher risk specialist funds. These charges reduce the investment return as a reduction in yield (RIY). In return for higher fund management charges the investor is expecting extra growth in the fund that will be greater than the extra charges levied thereby creating a higher investment return net of charges in the long term.

An individual can invest via a SIPPs, this being provided as an insured personal pension or PMFs, the latter being midway between the other two extremes. PMFs have similar investment restrictions and advantages as SIPPs but operate as a normal insured personal pension, having a fund link that is unique to the individual or partners in a partnership. The life assurance company will own the assets of the PMFs so these funds must satisfy various regulations. This includes the private managed fund managers being authorised by the FSA so technically the individual or partners cannot personally manage the pension fund, as is possible with a self invested personal pension scheme.

For a private pension scheme such as a personal pension or if prior to 1 July 1988, retirement annuity policies it is usually the practice to issue up to 1,000 separate but identical pension arrangements within the same policy and this is called segmentation. This segmentation is used in phased retirement and the advantages of this is that it; allows the individual to retire gradually as relevant earnings from their work reduce; will allow the fund to continue to grow in a tax free regime; allows the annuity rate to improve as the member becomes older; and allows the individual to retain any lump sun death benefit that would be paid free of income tax and inheritance tax (IHT).

Delaying final retirement
A private pension will allow the scheme member to delay taking a pension income in the form of annuities, but allows part of the pension fund to be taken as pension withdrawals. Provisions introduced in the Finance Act 1995 allowed members of personal pensions to opt for withdrawals, known as income drawdown rather than acquiring a compulsory purchase annuity, with the pension remaining invested with an insurance company fund.

This allows the member to have more control over their pension, but must still purchase a pension annuity at the age of 75 or switch to an Alternatively Secured Pension (ASP) and draw an income. When the scheme member takes drawdown, commutation to a tax free lump sum of 25.0% is possible and the balance of the fund can be used for drawdown. Pension simplification from 6 April 2006 replaces the Government Actuary's Department (GAD) income tables allowing a minimum income withdrawal of £0 and a maximum of 120% of a single life annuity and this income amount is to be reviewed every 5 years. Previous to A-Day the withdrawal levels were subject to minima (being 35.0% of the maxima) and maxima based on the GAD income tables on long-dated gilt yields that were reviewed every three years.

The tax free lump sum could also be used to buy a purchase life annuity. There are annuity taxation advantages for doing this which means that about 2/3rds of the income is a return of capital and free of tax and 1/3rd is interest and taxed at saving rate of 20%. Staggered vesting, also known as phased retirement, allows the member to defer drawing all of their pension benefits and spreading them over time, up to the age of 75 at which time the balance of the fund must be taken as a compulsory purchase annuity. However, the individual can exercise their right to an open market option where they can select the highest pension income from the market.

Designed to give the member more control over income at retirement age, phased retirement allows segments of the pension fund to be drawn when required. A personal pension plan will consist of up to 1,000 identical but separate segments. Each time the member draws on a segment, a tax free lump sum of 25.0% can be taken and the balance used to buy pension annuities. The remaining the fund value will remain invested with the provider.

When making an annuity purchase the individual has the option to search for the highest annuity rates using an open market option, however, learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised annuity quote offering guaranteed rates.

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