Personal pension scheme

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A Personal pension scheme is a UK tax-privileged individual savings plan, designed to build a capital sum exclusively to provide retirement benefits.

The capital sum must be vested (used to provide benefits) between age 50 and 75. On vesting a tax-free lump sum of up to 25% of the fund can be taken but the remainder must be used to provide an income either through a drawdown arrangement or through the purchase of an annuity. Under previous rules an annuity had to be purchased at age 75 even if a drawdown arrangement was in place, but since 6th April 2006 this has no longer been the case.

Contributions can be made either from the individual or from an employer. Under previous rules the contributions were limited to percentage of gross income that increased with age. These rules were changed from April 2006. In the tax year 2006/07, the maximum pension contribution that could be made without a tax charge is £215,000. Within this limit tax relief can be claimed on up to 100% of "relevant earnings". This annual limit of £215,000 is to be increased each year, rising to £255,000 in the tax year 2010/11 and is to be reviewed each year thereafter.

The pension fund itself grows tax-advantageously in that it is not subject to UK Capital Gains Tax. In addition, any income generated by assets within the pension fund (e.g. dividend income from shares) does not suffer any additional tax although the pension fund cannot reclaim any UK withholding tax already deducted from that income.

These plans were first introduced in 1987 to replace retirement annuity plans.

[edit] Tax treatment

Personal contributions receive basic rate tax relief claimed by the provider. That is: a £78 contribution will be grossed up to £100 on payment to the provider. Higher rate taxpayers can claim additional relief through their tax return.

An employer's contribution is paid gross and is an allowable expense against income or corporation tax.