A personal pension plan is a means for an individual to make their own provision of pension saving as they may not be part of an occupational pension scheme or may be self - employed. An employer may make workplace pensions available by way of group personal pensions. You can also have this in addition to a company scheme.

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You are able to pay regularly into a personal pension (monthly or annually), you can also transfer paid up and current occupational pension schemes to a personal pension and employers can continue to pay into this scheme if they wish. However, new regulations have been introduced regarding Auto-Enrolment which is explained here.

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Pension funds can be run by banks, building societies, insurance companies and unit trust companies.

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What can I contribute and how much tax relief do I receive?

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The maximum amount you can pay in each year, is the greater of all of your UK taxable earnings, or £3,600 including tax relief. The annual allowance for 2023/24 tax year is £60,000, if you should exceed this you will not be eligible for tax relief and may trigger a tax charge. If you are a basic rate tax payer you will receive 20% tax relief on contributions, giving those invested in unit trust funds & OEICs further growth within the fund than other available tax wrappers. For example if you are a basic rate tax payer and pay a contribution of £80, the provider will claim tax relief from HM Revenue & Customs on your behalf (relief at source) and add it to your pensions savings. This means for the £80 you contribute you invest £100. If you are a higher rate tax payer you may be able to apply for further tax relief.

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When I take money from my pension and how much tax do I pay?

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You are currently able to take benefits from age 55, which is increasing to 57 in April 2028.  Some occupational schemes can have restrictions and it is important to understand this before accessing your pension benefits. An important note to keep in mind, the earlier you access your benefits the further your money has to stretch. You will receive 25% tax free cash lump sum and the 75% will be subject to Income Tax. The amount of tax you pay depends on your total income for the year and your tax rate.

 

There was a limit of tax privileged pension capital a member can accumulate during their lifetime – called the 'Lifetime Allowance' (LTA). Once you take benefits, to see if any additional tax to pay, the pension scheme value is compared against remaining LTA every time a pay-out happens. For 2022/23 tax year, the LTA was £1,073,100. 

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However, from 6 April 2023, the LTA Tax Charge on pension savings in excess of the LTA was removed. This means that, if you take your pension benefits and they are in excess of the LTA after this date, they will not be subject to the LTA Tax Charge.  They will instead be subject to the same rate of tax as your other pension benefits (i.e., they will be subject to income tax at your marginal rate).

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It is important to note that, whilst the LTA Tax Charge has effectively been removed, the maximum level of tax-free cash (also called the pension commencement lump sum or PCLS) has not been increased: the maximum tax-free cash amount was frozen at £268,275 (i.e., 25% of the standard LTA for the 2022/23 tax year). Existing protection will continue to be relevant to maintain a higher amount on tax-free cash.

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The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

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