Personal pensions may be suitable if you're employed and not in a company pension scheme, or as a ‘top up’ addition to a company pension. You may also wish to set up a personal pension if you are self-employed or if you are not working but can afford to put aside money for retirement.

With a personal pension you pay a regular amount, usually every month or every year, or a lump sum to the pension provider who will invest it on your behalf. The fund is usually run by financial organisations such as building societies, banks, insurance companies, and unit trusts companies
The final value of your pension fund will depend on how much you have contributed and how well the fund's investments have performed. The companies that run these pensions charge you for starting up and running your pension. Charges are normally deducted from your fund in the form of fund management charges

Contribution Levels and Tax Relief

You can save as much as you like into any number and type of pensions
Up to age 75, you get tax relief on contributions of up to 100 per cent of your earnings each year, subject to an upper 'annual allowance' £235,000 for the 2008-2009 tax year
Savings above the annual allowance will be subject to a tax charge. Any employer contributions to your personal pension plan would count towards this annual allowance
For each pound you contribute to your scheme, the pension provider claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot
If you're on the higher tax rate of 40 per cent, you'll still get 40 per cent tax relief for any money you put into your pension. - but the way that the money is given back to you is different
Since April 2006, simpler rules have been applied to both personal and company (occupational) schemes. The new rules allow most people to pay more into their pension schemes – and on more flexible terms

Your pension fund will invest the money you save (including the tax relief amount) in your pension. Your pension fund growth may be free of tax. Any rise in the value of the scheme's assets between what you put in and what they're worth at the end is called capital gains and is tax-free.

Drawing your Personal Pension

When you come to take benefits you may be able to draw out up to a quarter of the value of your stakeholder or personal pension fund as a tax-free lump sum
That lump sum could in turn be used to purchase a tax efficient annuity

For the remaining Fund (after tax-free lump sum withdrawn) you have two broad options:

Use the rest of the fund you have built up to buy an annuity (a regular income payable for life) from a life insurance company. (The Annuity does not need to be provided by the same company that you have your pension plan with)
Take an income (taxed at your normal Income Tax rate) from the remainder of your fund while it continues to be invested – as an 'unsecured pension' up to age 75 or an 'alternatively secured pension' once you reach age 75

Putting money into someone else's personal pension.

You can put money into someone else's personal pension – like your husband, wife, civil partner, child or grandchild's
They'll get tax relief added to it at the basic rate, but this won't affect your own tax bill

These notes ("Understanding Personal Pensions") are intended to provide a general appreciation of the topic and it is not advice. Guidance should be sought from a specialist like ourselves who is qualified to advise in your specific circumstances.

We offer Personal Pensions, including an Individual Stakeholder plan. You should remember that the value of your pension fund can fall as well as rise and is not guaranteed. This means that you could get back less than you put in.

For more information on Personal Pensions, please contact Cheltenham Independent Financial Advisers Limited on 01242 269656 or email us at info@cheltenhamifa.co.uk. One of our advisers will be happy to assist you.