Guide to personal pensions

Personal pensions were launched by the government in 1998 to encourage more people to save for their retirement. Prior to 1988, self employed people who were not eligible to join company pension schemes could only invest in retirement annuity contracts.

Use the links below to move to the section you want to read:

• How much can I contribute to a personal pension?
• Which companies offer access to personal pensions?
• Who can contribute to a personal pension?
• What can a personal pension invest in?
• Can I change my investment choices?
• What happens if I die before I take my pension?
• When can I take the benefits from my personal pension?

The contribution limits and tax advantages of personal pensions are identical to those of other types of personal pension, such as stakeholder pensions and Self Invested Personal Pensions (Sipps). You can invest up 100 per cent of your earnings subject to a limit of £245,000 in the tax year 2009-10. This limit rises each year by £10,000 to reach £255,000 by tax year 2010-11. Since April 6 2006, it has been possible to pay into a personal pension, as well as other pension schemes, including company pension schemes, providing you do not contribute more than 100 per cent of your earnings in total (subject to the annual contribution limit applicable at the time).

Is there a limit to how much I can hold in a stakeholder pension?

Since 6 April 2006, there has been a limit known as the lifetime allowance for the relevant year in which you retire that you can hold in total in all your pension schemes and still enjoy the tax privileges associated with pensions. If the total value of all your pensions exceeds this limit, there will be a charge on the excess over £1.5m of 25 per cent if the excess is used to provide income, and a 55 per cent charge if you take the excess funds as cash.

The lifetime allowance rise each year as follows:

Individuals could protect the the total value of their pension funds by registering them for "pension protection" by 5 April 2009. However, you may still have to pay some tax on any excess over the lifetime allowance when you retire.

Personal pensions are offered by a large number of insurance companies. See a list of providers here.

To have a personal pension you must be under age 75 and be a resident in the UK, or a Crown servant or the spouse or registered civil partner of a Crown servant. Crucially, you can have a personal pension as well as belonging to a company pension scheme.

What are the costs of a personal pension?

There may be a set-up or initial charge of up to 5 per cent, and all companies charge an annual management charge (AMC) of 0.5-1.5 per cent, which covers the administration and management of the plan. Some providers have tiered AMCs, so that as your fund grows, the AMC gradually falls. Although personal pension charges have fallen in recent years, they can still be more expensive than stakeholder pensions which cannot charge an AMC of more than 1.5 per cent a year in the first 10 years, and 1 per cent thereafter.

Personal pensions can be invested in a very wide range of with profit and unit-linked pension funds offered by the insurance company of your choice. Many personal pension providers also offer externally managed funds in order to tap the investment expertise of other investment houses.

It is not uncommon for a personal pension plan to have a fund choice of hundreds of funds covering the following fund types:

• risk-based managed funds, e.g. cautious, balanced, aggresive
• UK and overseas equity funds
• index tracker funds
• cash funds
• gilt and fixed interest (bond) funds
• with profits
• property funds
• emerging market funds
• green/ethical funds

With help from your financial adviser, or by using the fund information and research tools available from product providers, you can ascertain your attitude to risk and the target income you wish to achieve for your retirement, and then select appropriate investment funds accordingly.

You can switch between the investment funds of your provider at any time, but there may be a small charge for switching. Always check with your provider before making any changes to your pension fund.

What happens if I change contribution level, investment funds or switch to another provider?

There may be a charge for switching funds and for transfers in and out of your plan, but not for reducing or increasing your contribution level (at least not on contracts being sold now). Older contracts may still make a charge for this.

If you die before age 75 (without having taken any benefits from the fund), the full value of your personal pension will normally be used to provide a cash lump sum for your dependants. However, part of your fund may have to be used to buy a pension for your spouse or registered civil partner, if you have a separate "protected rights" fund because you've contracted out of the State Second Pension (formerly known as Serps).

You can currently take personal pension benefits any time between age 50 and 75, even if you're still working. From 6 April 2010, however, the minimum age at which you can start taking your pension will rise from age 50 to 55.

By age 75, you either have to convert your personal pension fund into an annuity or take an Alternatively Secured Pension (ASP). For more on ASPs, see the Guide to Pension Drawdown.

How can I take the benefits from my personal pension?

At your selected pension date, you will have a number of options to choose from, including:

• using your entire personal pension fund to buy an annuity which will give you a regular taxable income for life;
• taking up to 25 per cent of your fund as a tax-free cash lump sum, and using the balance to provide a (reduced) taxable pension for the rest of your life, via an annuity;
• giving up part of your pension, to provide a taxable pension for your spouse, registered civil partner or other dependant after you die;
• choosing whether you want your pension to remain level throughout your life or to increase automatically each year by a set percentage, (known as escalation);
• delaying the purchase of an annuity, but still taking a taxable income (if you want) by taking an Unsecured Pension.