Personal Pensions for the Self-Employed
If you are self-employed the subject of pension plans might seem a bit of a minefield, which is why we have compiled this guide to help give you the essential information about all of your options that will hopefully make your choice much easier.
You have 3 options available to you as a self-employed person:
1. A personal pension plan
2. A Stakeholder Pension plan
3. A Self Invested Personal Pension (SIPP) plan
Personal Pension Plans
Perhaps the best known of all the options, a personal pension plan is a policy available to anyone in the United Kingdom under the age of 75. The money contributed by the purchaser is invested and a fund built up. At retirement age, the fund is then distributed to the purchaser who has the choice to either take a tax free lump sum of up to 25% with the remainder being used to purchase an annuity to provide a recurring income, or no lump sum and a higher rate of income. The amount payable is dependent on the following.
There are a wide range of outlets to purchase a personal pension plan; these include the Post Office, high street banks, supermarkets, online and your financial advisor.
Stakeholder Pension Plans
A Stakeholder Pension plan is a different type of personal pension plan which is designed to provide a recurring income at the age of retirement. The plan works in the same way as a personal pension plan with the exception being it has to adhere to a set of rules set out by the government which are as follows:
You can purchase a Stakeholder Pension plan in the same way as a personal pension plan and the amount paid out depends on the same factors.
Self Invested Personal Pension (SIPP)
Another type of personal pension plan with the same basic rules regarding contributions, eligibility and tax relief, but with much more freedom given to the policy holder as far as where the fund is invested is concerned.
When a person buys a standard personal pension plan the money is usually paid to an insurance company to invest in an insurance policy and the area of investment is determined by the plan provider. A SIPP allows the plan holder to choose the investments and borrow against the assets of the plan (up to 50%), to make investments that will benefit the plan. The plan holds the investments and can be run by the holder, a fund manager or a stockbroker.
The fund is established under a trust which controls and operates the fund under instruction from the member.
It may seem that a SIPP would be the obvious choice but there do tend to be more charges for set up and administration than there are with Stakeholder and personal pension plans. Also, the wider variety of investment choice does lead to an increased risk of an under performing fund, but also has the potential to perform substantially better.