The story of personal pensions has evolved, since the original legislation in 1970 which created the framework for the old style Section 226 policies through to the introduction of personal pensions then stakeholders, consumers have been presented with increasing choice of how to plan for retirement. Further changes within this market are expected in 2012 with the implementation of National Employment Savings Trust (NEST).

The treatment of S226 differs from Personal Pensions and Stakeholders (e.g. treatment of tax free cash) so advice should be taken when considering the implications of continuing these older style products. Any existing S226 member can continue to make contributions towards them until their actual retirement age, however these schemes are closed to new business.

Before Stakeholder Pensions were introduced from 6 April 2001, the Personal Pension was the most popular type of private pension scheme taken out by an individual and still seems to be the favoured method of saving for retirement. Also for an employers pension scheme a Group Personal Pension(GPP) is now more common mainly due to their simplicity and low administration cost of operation as opposed to an Occupational Pension Scheme.

Currently the retirement age can be selected from 55 and retirement benefits taken as a pension income provided by an annuity as well as the option to commute some of the fund in the form of a tax free lump sum, equivalent to 25.0% of the pension fund value. Alternatively, the member could defer the purchase of an annuity by opting for pension draw down.

Stakeholder pensions

The Welfare Reform and Pensions Act 1999 introduced the new stakeholder pensions and this pension regime was made available from the 6 April 2001 as the government’s intention to simplify and reduce the cost of pension planning to the consumer. It is targeted particularly for those with fluctuating, low or no taxable earnings such as a non-working spouse.

Employers can contribute to a stakeholder but there is no legal obligation for them to do so, many stakeholder pensions were set up to meet legal requirements imposed upon firms rather than to improve employee benefits.

The maximum annual contribution to a Stakeholder pension is £3,600 or 100% of earnings with tax relief as a result of Pensions Simplification from 6 April 2006.

For members of an occupational pension scheme the Inland Revenue will allow them as a result of Pensions Simplification, concurrent membership of as many other pension schemes as is required subject to the annual allowance and lifetime.

As you have just learned, the market place is confusing, it is not just about taking out a Personal Pension but also understanding your options and reviewing these options to ensure the right path is taken. Our consultants can advise you and guide down the right path.

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