For those with no opportunity to join a company pension scheme, you can take out a personal pension (PP) which is a money-purchase scheme, building up a pot of money before investing it into an annuity on retirement. The final value will depend on performance, charges and contributions. And the pension is not linked to any one job or employer, as the employer does not usually contribute – although you could try to negotiate a contribution from your employer.
As with other pension schemes, contributions qualify for tax relief at your marginal tax rate, so for basic-rate taxpayers a contribution of £100 costs you £78, and for higher-rate taxpayers the cost is £60. You can contribute up to 100 per cent of your annual income, subject to a maximum of £215,000.
Ideally, you should put in as much as you can afford, and if you have not used your limit in one year you may be able to go back over the previous six years to make up for any shortfalls. On retirement, you can take up to 25 per cent of the fund as a cash lump sum, with the remainder financing the purchase of an annuity which will pay you an income until you die. So the future level of annuity rates when you retire is potentially as important as the value of your fund in determining your pension.
When planning, you need to consider three things: performance, charges and the plan's flexibility. These are important decisions, so you might want to take professional advice from an independent financial adviser.
The performance of the fund-management team responsible for your PP will be central to its ultimate value. Invariably, a percentage of your contributions will be consumed by annual charges, and these range enormously between providers, so look for a reasonable balance between charges and performance.
And to ensure that your plan is as flexible as you need it to be, ask for figures illustrating what you would get back after various time periods. A plan that will pay you back at least what you put in after two years may be the best you can find.
In addition, you should also check if you can vary the contributions or stop paying them at any time without penalties – this is important
