Personal pensions (also known as private pensions) are investment policies designed to provide you with a regular income in your retirement.

 

They are available to any UK resident who is under 75 years old and can be purchased from providers such as insurance companies, high street banks, building societies and investment organisations.

 

Personal pensions are defined contribution (money purchase) arrangements, meaning you contribute to the policy, the money is then put into investments such as bonds, stocks and shares by the pension provider and the fund builds up.

 

The earliest age you can take out your personal pension is 55, but this is subject to your plan’s restrictions. You can also put off taking it until you are 75.

 

When you do retire, you can generally take up to 25 per cent of the value of the fund as a tax-free lump sum and use the rest to buy an annuity which will provide you with an income for life.

 

The amount of income you will receive from your personal pension when you retire depends on how much you have paid into the scheme, how well the investments perform and the annuity rate at retirement.

 

So when you take out a personal pension there are no guarantees of returns and the value of your investments can go down as well as up.

 

You will receive a yearly forecast from your pension provider telling you how much your fund is worth and how much you can expect to receive if you continue to contribute at your current level.

 

If you want to have more control over the investments in your personal pension you can choose a self-invested personal pension (SIPP). A SIPP allows you to make your own decisions on what assets or funds to acquire or dispose of and when, subject to the agreement of your SIPP provider.

 

Sipp charges tend to be higher than other types of personal pension because they offer greater flexibility and access to a wider range of different asset classes. SIPP holders can choose to invest in insurance funds, unit trusts, investment trusts, shares and commercial property, rather than a small selection of funds.

 

A personal pension may be a suitable option if you are self-employed, not working but can afford to pay for a pension, if a partner or family member wants to contribute to your pension, or if your employer does not offer a company pension scheme.

 

If you are moderate earner with no access to a company pension, a stakeholder pension is a type of low cost, flexible personal pension that allows you to stop and start payments and vary the amount you put in.