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Personal Pension Plans
You do not have to be in employment to take out a Personal Pension Plan and you can also provide a Personal Pension Plan for your spouse/partner or your child/children. The policy reverts to the child/children at the age of 18.
Designed to offer a lump sum and income in retirement, a personal pension is available to any United Kingdom resident who is under 75 years of age. When you contribute to a Personal Pension plan, your money is invested and a fund is built up. The amount of pension payable on retirement depends upon:
- the amount of money you paid into the scheme
- the performance of the investment fund
- charges payable under the plan
- the 'annuity rate' at the date of retirement. The annuity rate is the factor used to convert the pension fund into a pension.
When you can take pension benefits
The concept of a normal retirement age has disappeared, as have constraints on drawing occupational benefits while still employed by the scheme sponsor, although many schemes may not take advantage of all the extra flexibility. The minimum age for drawing benefits is 55 but benefits no longer have to be drawn by age 75. The government scrapped this upper age limit from April 2011 and introduced a system of capped and flexible drawdown schemes as an alternative to annuity purchase.
The 2014 Budget introduced wide-ranging changes to the pensions market, with a number of measures coming into effect immediately from March 2014. With effect from April 2015, the rules involving annuities and income drawdown will change, with the result that pensioners will have the freedom to access all the funds in their pension pots, 25% of which will continue to be free of tax and the remaining funds will be subject to normal income tax rules. This means that from April 2015, pensioners will have complete flexibility to withdraw as much or as little of their pension as they want, at any time.
Further details are provided under the sections of the website entitled ‘Annuities’ and 'Income Drawdown' under Pensions.
No inheritance tax if you die before retiring
If you die before age 75 and you have not started to take benefits from your pension the funds will normally be passed to your spouse or other elected beneficiary free of inheritance tax. Other tax charges may apply depending on the circumstances.
It is possible to continue past age 75 without taking benefits. If you die after age 75 your pension pot can still be passed to a nominated beneficiary free of inheritance tax, however a 55% tax charge will be applied if paid as a lump sum. If it is paid as an income to your spouse or dependent there will be no initial tax charge but any income paid would be subject to income tax. In March 2014, the government announced that it considered the 55% tax rate on lump sum death benefits is too high and that a consultation process for change would be undertaken.
Pension Fund Calc