Starting a personal pension

Personal pensions are suitable for people who cannot (or do not wish to) join a company scheme, the self-employed, those who change jobs frequently and those in irregular work. The basis is money purchase so there is no guarantee of benefit amount.

Contributions

These are usually paid regularly each month but can be irregular and some people prefer to wait until the year end to see how much they can afford.

A regular payment has a certain discipline but you are usually tied to a contract and charges tend to be higher. With lump sum payments will not be tied and so can seek the best deal each time. Either way, a flexible arrangement is sensible, so that you can increase or reduce contributions at will.

Contributions can be paid into an individual pension account (IPA) which is a 'wrapper' like an ISA and gives much greater control over how the money is invested.

Inland Revenue limits

Maximum contributions start at 17.5% of earnings and increase with age, up to 40%

:or those over 60, subject to the same earnings limit as occupational schemes. There s no limit to the amount of the pension. The tax-free lump sum can be up to 25% of the fund.

Since April 2001, when stakeholder pensions came in, it is possible to make annual contributions of £3,600 to personal or stakeholder pensions, or both together, the earnings-related limits only applying to higher levels of contributions.

Personal pensions

Shop around with a list of questions: ~ How flexible can the contributions be? ~ What are the charges?

• What are the penalties (if any) for stopping and transferring?
• What happens if you die before buying an annuity - is your fund protected from inheritance tax?
• Are there penalties if you buy your annuity elsewhere?
• What is the past growth record of the fund you will be investing in?
• How safe will your fund be?

Retirement

After taking any tax-free cash, the balance of the fund must be used to buy an annuity. This can be done at any age between 50 and 75 and so can be postponed beyond retirement. The possible advantage of delay is that the stock market and/or annuity rates might improve.

If annuity purchase is deferred, income must be drawn directly from the fund within minimum and maximum percentages.

Deferment may be appropriate if you intend to work part time. Otherwise, experts suggest that it is not viable if your fund is below £100,000.

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