Personal Pensions - contact us about a personal pension

The personal pension replaced retirement annuity contracts (RACs) and Section 226 policies from 1 July 1988 being approved under Chapter IV of part XIV of the Income and Corporation Taxes Act 1988 (ICTA).

The RACs are approved under Chapter III of Part XIV of the Income Corporation Taxes Act 1988. Being very similar to personal pensions, RACs contributions qualify for full tax relief and the pension fund will grow free of tax on investment income and capital gains tax. There is also the possibility for commutation to a tax free lump sum at retirement age. However, retirement age is restricted to between 60 and 75. 

Both carry back relief and carry forward relief is available and retirement annuity policies are unaffected by the restrictions imposed on personal pensions from 6 April 2001. Any existing RACs member can continue to make contributions towards them until their actual retirement age, however these schemes are closed to new business.

Section 226 policies originated from the Income and Corporation Taxes Act 1970. These policies will allow an individual to purchase his or her own pension and includes a lump sum death benefit and offers cash commutation of up to 33.0%, which is higher than a personal pension giving 25.0%. Therefore existing section 226 members should retain these policies to retirement age, however these schemes are closed to new business. At retirement the individual can use the tax free lump sum to buy a purchase life annuity which offers annuity taxation advantages rather than use the whole pension fund for a pension annuity.

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. 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. Since the 6 April 2001 stakeholder pensions have been available and can be used where a personal pension is not appropriate, for example, when the individual has no taxable earnings. 

All personal pensions are contributory schemes and can be taken out by the self employed or employed as well as allowing an employer to make contributions directly to the plan. However, an individual cannot contribute to a personal pension where they are already making payments to an occupational pension scheme such as final salary pension or additional voluntary contribution (AVC) scheme as concurrent membership is not permitted. 

The retirement age can be selected between 55 to 75 and retirement benefits taken as a pension income provided by acompulsory purchase annuity or pension annuity and allowing the scheme member a commutation to a tax free lump sum of 25.0% of the pension fund value. The member could defer the purchase of annuities by opting for pension drawdown. However, an open annuity may allow anyone with funds of £250,000 to avoid purchasing conventional annuities and therefore there is the opportunity to leave the residual pension fund to beneficiaries after 55 years of age.


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