Personal pensions

Pensions are a particularly good product for tax-conscious investors, because they boost the value of every £1 you invest - as you receive tax relief of at least 20%. Many other products make you wait until your first income payment – or even until the plan matures – before you see any tax benefits.

Pension contributions give you tax relief at the highest rate you pay. For a 40% taxpayer, that means for every £100 invested, the net cost to you is only £60. All pension policy holders can take at least 25% tax free cash regardless of what type of pension you may have.

You and your employer are about to pay up to one annual allowance for that tax year. This amount is up to 100% of your relevant earnings and for the tax year 2008/2009 this allowance is capped at £235,000 with the limit set at £3,600 for low or non earners paying into a personal and stakeholder pensions.

There is now a limit on the money built up within your pension called the Lifetime allowance. In the tax year 2008/2009 this amount is £1.65 million.

Contribution annual allowances
2008/2009 £235,000
2009/2010 £245,000
2010/2011 £255,000

Lifetime allowance limits
2008/2009 £1.65 million
2009/2010 £1.75 million
2010/2011 £1.80 million

Don’t delay starting a pension plan

If you feel confident enough, you also have the option of a Self-Invested Personal Pension (SIPP), where you can manage your own investments such as stocks, shares, bonds, unit trusts or even other assets such as property within a tax-efficient pension wrapper.

Every £1 you commit to a pension scheme now is particularly valuable, because that is the money which will have the most time to grow before you reach retirement age. Every month you delay starting a pension plan increases the amount you will need to save in the future to provide yourself with a reasonable income in old age.

What type of pension scheme should I invest in?

There are a number of different types of pension plans and scheme to choose from, and the plan appropriate to you will depend on your circumstances.

With few exceptions, employers with five or more workers on the payroll have to provide workplace access to a Stakeholder pension or an equivalent type of pension scheme and have a system to ensure contributions to the plan can be deducted directly form pay.

If you are employed and your employer runs an Occupational or Company pension scheme, it almost always makes sense to join it, especially if your employer makes contributions to your fund as well as you.

If your employer does not offer a Company pension scheme, or if you are self-employed, you should consider first a Stakeholder or Personal pension plan. If employed, you may be able to persuade your employer to make contributions too.

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