Individual Pensions

Limits on contributions

Personal Pensions As a result of the tax relief given on contributions the Inland Revenue imposes limits on the amount of contributions that can be made to Personal Pensions. The limits are applicable to your gross earnings in any tax year and vary according to your age. The earnings figure is also limited to something known as the earnings cap. The earnings cap is £99,200 for the tax year 2003/2004. The contribution limits are Age % of earnings (subject to the earnings cap) Under 36 17.5% 36 to 45 20.0% 46 to 50 25.0% 51 to 55 30.0% 56 to 60 35.0% 61+ 40.0% Therefore if your earnings in the tax year 2003/2004 were £25,000 and you were age 48 then the maximum you could pay into a Personal Pension would be £25,000 * 25% = £6,250. If you were earnings £150,000 in the year 2003/2004 and you were 56 then you could pay at most £99,200 * 35% = £34,720. As the contributions to the pension are limited the pension which gets paid does not have any limits imposed on it. This is because if the contributions are limited in some way then indirectly so are the pensions that can get paid from them. Stakeholder Pensions The main differences between Stakeholder and Personal Pensions are Stakeholder Pensions have a maximum annual charge of 1% of the value of the fund Stakeholder Pensions must accept transfers in Stakeholder Pensions must have a default investment option Stakeholder Pensions generally have a more limited choice of investment funds because of the restriction placed on the annual management charge (max 1%) The minimum contribution must be at least as low as £20 per month. There can be no penalties on the transfer of funds or on the cessation of contributions Stakeholders are basically just Personal Pensions with some restrictions on the charges that companies can make for providing them. The price that the consumer must pay for this is that they do not come with as many "bells and whistles" as Personal Pensions. One big difference is the reduced set of investment options typically available through a Stakeholder Pension. However that said, if you want a bog standard pension and low charges then it is difficult to go to far wrong with a Stakeholder. If you are in doubt, get Independent Financial Advice.