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PENSIONS GUIDE

A personal pension

A personal pension is a tax-efficient savings plan that enables you to save for retirement. The contributions attract tax relief and they can be made in various ways, either regularly, by lump sum or by a combination of both.

On retirement, up to 25% of the fund value can be taken as a tax-free cash lump sum. The remainder of the fund must be used to buy an annuity. (An annuity provides a guaranteed income for life in return for a lump sum investment.) Most contributions are invested on behalf of the saver by a specialist organisation and are invested in the financial markets in various ways.

Unit-linked personal pension

Such pension contributions are used to buy units in a pooled fund or funds.

Unit-linked pensions are invested in a variety of funds. The funds are grouped together in sectors, representing the style, area and risk level in which the relevant pension fund has chosen to invest.

As the value of the units may fall and rise during the period of investment, care is taken to ‘spread’ the investment in a variety of ways to obtain the best return commensurate with prudent investing.

Most companies will allow for switching of funds at any time during the life of the investment. This becomes more relevant as retirement approaches and the riskier funds are often seen as less attractive than the more cautious funds. Towards the end of the period the fund is usually moved to a fixed investment where the increases are lower but guaranteed.

With profits personal pensions

Traditional with profits personal pension

Contributions are invested in a with profits fund. Each year bonuses are added to the investment, either by an increase in the price of units or by allocation of extra units. Once declared these bonuses cannot be removed and are seen as one of the attractions of with profits investments. This annual declaration of bonuses is known as 'smoothing', and protects the pension investor, to some extent, from the ups and downs normally associated with stock market investments.

Unitised with profits personal pension

Contributions are used to buy units in an insurance company’s with profits fund. The value of these units will increase annually, by an amount that depends on the investment performance and profits of the insurance company. On maturity a terminal bonus may also be awarded. Unitised with profits plans are seen as a halfway house, mixing together the safety of a traditional with profits fund with the potential of unit-linked investment achieved with some risk, whilst not subjecting the investor to the full risk of stock market investments.


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