Personal pensions

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.

You choose the provider and make arrangements for your contributions to be paid. The provider claims tax relief at the basic rate and adds it to your fund. If you are a higher rate taxpayer, you will need to claim the additional rebate through your tax return. You also choose where you want your contributions to be invested from the range available from your provider.

How does it work?

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 fund is usually invested in stocks and shares, along with other investments, with the aim of growing the fund over the years before you retire. You can usually choose from a range of funds to invest in. Remember though that the value of investments may go up or down.

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.

""NO DECISION ON LUMP SUM INVESTMENTS AND PENSIONS SHOULD BE TAKEN BASED ON THE CONTENT OF THIS SITE. ALWAYS TAKE FULL INDIVIDUAL ADVICE FIRST. THE REGULATIONS GOVERNING TAX RATES AND INVESTMENTS MAY CHANGE IN THE FUTURE.""