What is a Personal Pension?

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Pensions are long-term investments with special tax rules – for example, you get tax relief on contributions.
 
A personal pension is one that you take out yourself, for example if you're self-employed or your employer doesn't offer a pension arrangement. They are a type of money purchase pension.
 
The fund builds up using your contributions, investment returns and tax relief. It helps to think of money purchase pensions as having two stages:
 
Stage 1
The value of the policy builds up using your contributions, investment returns and tax relief.
 
Stage 2
When you retire, you can take a tax-free lump sum from your fund and use the rest to secure an income – usually in the form of a lifetime annuity.
The amount of pension income you'll get will depend on:
  • how much you pay into the fund;
  • how much, if anything, your employer pays in;
  • how well your investments have performed;
  • what charges have been taken out of your fund by your pension provider;
  • how much you take as a tax-free lump sum;
  • annuity rates at the time you retire; and
  • the type of annuity you choose.
For a Personal Pension Tax free cash is 25% of the fund.

Important Information

Taking any of your pension benefits early is likely to reduce your income at retirement. Therefore, pension release is only suitable for a very limited number of people and circumstances and should not be seen as an easy option for raising cash. This is because a pension is designed to provide you with benefits when you retire. The guidance and/or advice contained in this website is subject to UK regulatory regime and is therefore restricted to consumers based in the UK. The Financial Services Authority does not regulate some forms of tax advice, secured loans, unsecured loans, debt management and Wills. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.