Pensions
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2. Private pensions: your most tax efficient investment
Private pensions are arguably the most tax efficient mainstream investment in the UK.
- You get full tax relief on your contributions - the amount you pay into them
- The fund rolls up free of capital gains tax and virtually free of income tax
- The pension itself is taxed as income but you can take a substantial chunk of the fund (25% in the case of personal pensions) at retirement as tax free cash
There are two types of private pension:
- Company pension schemes:
Over 11 million employees and their spouses rely on company pension schemes in their retirement and for family protection insurances during their working lives. Over £750bn is invested in occupational pension funds which are used to pay for these benefits. - Personal pensions:
A further 5-6 million employees and self employed people have personal pensions which are invested in funds worth £225bn. In addition, thousands of small businesses and professional partnerships operate pension schemes which in some cases are unique to the UK.
Stakeholder pensions are a new type of personal pension, introduced by the government in April 2001, to encourage more people to save for their retirement. For a pension scheme to be a 'stakeholder' it must have:
- a maximum annual charge of 1%
- minimum contributions of £20
- no penalty charges for changing the amount contributed, taking payment holidays or paying in a lump sum
For more information, including a list of qualifying schemes, see stakeholder.opra.gov.uk.
As a rule of thumb company schemes offer best value but if your employer does not offer this benefit you will need a personal pension plan.
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