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A Personal Pension Scheme (PPS), sometimes called a Personal Pension Plan (PPP), is a UK tax-privileged individual investment vehicle, generally designed to build a capital sum to provide retirement benefits, although it may also be used to provide death benefits. The PPS can be Crystallised , or Vested , (used to provide benefits) from age 50, although this is to be changed to 55 on 6th April 2010. A PPS must be crystallised by age 75. On crystallisation, a pension commencement lump sum (PCLS), also known as tax-free cash, of up to 25% of the fund can be taken. The remainder can be used to provide a taxable income either directly from the fund (this is called Unsecured Pension (USP), and has previously been called income drawdown or pension fund withdrawal), or by exchanging the fund for a secured pension income through the purchase of an Annuity . One of the most attractive benefits of taking USP as opposed to annuity purchase is the ability to pass on the value of one's pension fund in some form. There is also the possibility of further capital and income growth in this part of retirement, although there are corresponding risks, and the Financial Services Authority (FSA) suggests that one should take Independent Financial Advice both prior to entering into a USP arrangement and regularly throughout. Prior to pension rule changes introduced on 6th April 2006, under what was called 6th April 2006 , it was necessary to discontinue USP (if you had been taking it) at age 75 and to purchase an annuity. In April 2006, a new option for post 75-year olds, called Alternatively Secured Pension (ASP), was introduced. This was still to allow the value of one's fund to pass onto the next generation on death, although only into one's dependents' pension funds rather than as cash and only subject to possible inheritance tax (IHT) charges. Unfortunately, Gordon Brown subsequently decided that ASP was too generous, and in the Finance Act 2007 amended the rules so that the lump sum could only be passed to charity on death (or passed to one's family, but after an 82% tax penalty). This in effect returns us to the former position, where for most 75 year olds, converting to an annuity will be the most attractive options. Contributions to a PPS can be made either from the individual or from an employer. An individual can, each year, put in an amount up to the lower of 100% of their earned income or the prevailing '''annual allowance'''. The annual allowance for tax year 2007/08 is £225,000. It is worth noting that an individual can in fact put in higher amounts if they wanted to, but would not be allowed to claim tax relief on the surplus. At the other end, low or non earners are allowed to contribute £3,600 per year. An employer can contribute an amount of up to the annual allowance each year, provided that they can demonstrate to the local inspector of taxes that this contribution has been made wholly and exclusively for the purposes of the business. This definition is open to wide interpretation and HMRC have yet to provide any more concrete guidelines. The annual allowance is to be increased each year, rising to £255,000 in the tax year 2010/11 and is to be reviewed each year thereafter. The PPS fund itself grows tax-advantageously in that it is not subject to UK Capital Gains Tax. In addition, any income generated by assets within the pension fund (e.g. dividend income from shares) does not suffer any additional tax although the pension fund cannot reclaim any withholding tax already deducted from that income. These plans were first introduced in 1987 to replace Retirement Annuity Plan s. There are two types of Personal Pension Scheme- Insured Personal Pensions, where each contract will have a set range of investment funds for planholders to choose from (this is not as restrictive as it sounds, as some modern schemes have over 1,000 fund options), and Self-Invested Personal Pensions (SIPPs). Insured Personal Pensions with charges capped at a low level are known as Stakeholder Pensions . TAX TREATMENT Personal contributions receive basic rate tax relief at source claimed by the provider. That is: a £78 contribution will be grossed up to £100 on payment to the provider. Higher rate taxpayers can claim additional relief through their tax return. In this example, they would be able to claim back £18, so they would have effectively paid out only £60. An employer's contribution is paid gross and is an allowable expense against income or corporation tax. SEE ALSO
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