Self-Employed/Personal Pension Plans

INTRODUCTION/ALLOWANCES

Eligibility
You are eligible to invest into a HMRC registered personal pension plan even though you do not have any earned income.

Maximum Contributions
In this tax year you are allowed to make a gross contribution to a personal pension plan up to the greater of:

• £3,600 and
• 100% of your 'relevant UK earnings'. However, in 2006-07 total contributions to all your pension arrangements from all sources should not exceed the annual allowance of £215,000. Any contribution above this future would effectively not be tax relieved.

Relevant UK earnings' are broadly earnings after deducting capital allowances and losses.

Retirement age - 50/55
Under a personal pension plan, currently you can start to draw your pension from age 50 or 55, see below. You may be able to take the pension earlier if you can no longer work because of mental or physical incapacity. The contract can provide a pension benefit to your widow, widower or dependant after your death, either before or after you start to draw your pension.

Age 55 and 2010
From 6 April 2010, the minimum age at which your benefits can be drawn will rise to 55. As a result you will be able to draw benefits from your 50th birthday until 5 April 2010, but then have to wait until your 55th birthday before starting to draw any further benefits.

Lifetime Allowance
The new rules for pension taxation introduced from 6 April 2006 set a lifetime allowance for the total value of pension benefits. Above this level (£1,500,000 in 2006-07 rising to £1,800,000 in 2010-11) there could be a lifetime allowance charge at up to 55% when you draw benefits.

Simplification details
Further details about the new tax rules for pensions effective from 6 April 2006 are contained in the appendix. (Cross reference appendix 12.)

MAIN TAX ADVANTAGES

Tax deduction
The contributions paid under such a registered pension plan are allowed as a deduction from your taxable earnings, thus saving income tax at your top rate(s). You receive basic rate tax relief at source regardless of your tax position. For example, the immediate cost of a £1,000 gross contribution is £780. Higher rate relief is given through your tax assessment.

Tax-free roll-up in the fund
The contributions are invested in funds that accumulate free of UK tax on investment income and capital gains, although it is no longer possible for pension funds to claim the tax credits on dividends from UK equities. Nevertheless, the freedom from UK tax is still a significant investment advantage.

Pension taxed as earnings
The pension, when it becomes payable, is taxed as earned income.

Tax-free cash sum
Part of your fund can be taken as a completely tax-free cash sum at retirement. This sum must not be more than 25% of the total fund and not mote than 25% of the then lifetime allowance.

Life cover
Valuable and inexpensive life cover can be arranged alongside the plan with important advantages for inheritance tax purposes.

BENEFITS ON MATURITY

Benefits on maturity
The plan contains an option which allows you to transfer the accrued value of your fund to any authorised insurance company to buy a pension. This allows you to benefit from the best annuity rates available on the open market at that time. Alternatively, you may be able to draw an income in retirement directly from your pension fund.

DEATH BENEFIT

Type of trust
Under the provisions of this trust, the benefits can be paid within two years of your death to any among a wide class of beneficiaries, which could include your children. The proceeds would normally be payable free from inheritance tax if you die before age 50/55. Such a trust is not subject to the new inheritance tax rules for trusts introduced by the Budget. This can be a useful method of providing money to those persons who will have to pay any inheritance tax in the event of your death. Use of a trust also has the advantage that the death benefit can be paid before probate is received.

LIFE COVER

Lifetime allowance
There is no limit to the amount of life cover that a pension life cover policy can provide on death before age 75. However, if the value of the lump sum payable plus the value of any other pension benefits previously drawn exceeds the lifetime allowance (£1,500,000 in 2006-07), the excess would normally be subject to a lifetime allowance charge at a rate of 55%.

Survivors' pensions
The lifetime allowance charge does not apply to any life cover payments used to fund pensions for your widow or widower or other dependants.

IHT-free
These benefits can be arranged so that the proceeds can be paid to beneficiaries without any charge to inheritance tax.

Tax relief on premium
The premiums will be set against earnings, thus obtaining tax relief at your marginal rate(s). However any amount paid as premiums under such an arrangement will reduce the amount available for pension provision

ILLUSTRATION - PENSION PROVIDER AND BENEFITS

Illustration
By requesting a quotation you were provided with an illustration with the full terms and conditions from the pension provider for a plan for yourself based on a single contribution, contributions over a year or contributions each month. You were also provided with the key features document showing the provider's charges and the commissions payable.

You should read the illustration and key features carefully; they contain important information about your rights and benefits under the plan.

Affordability
The contribution should be readily affordable now and in the future, based on an analysis of your income and expenditure.

QUESTIONS ABOUT YOUR PENSION COMPANY

Personal pension - choice of provider
You should consider research undertaken using tools such as CTP,Exchange,Aequos,Trustnet and others show the pension provider to offer a competitive product. :

Reputation/administration

• Does the pension provider have an excellent reputation in the pension market and has proven administrative systems..

Size

• Is the pension provider substantial, well-established and financially strong eg, is it rated AA,A by Standard and Poors.

Range of funds

• Does the pension provider offer a wide range of funds.

Multiple funds

• Does the plan offer access to a wide range of funds run by leading external fund managers. Switches between these funds should be available at minimal cost.

Charges

• The charging structure of the plan should be very competitive and meets the current stakeholder standards.

Flexibility

• The plan is relatively flexible, allowing the investor to increase or reduce the amount of the regular investment. Nevertheless, the returns on the plan can be reduced if contributions are stopped prematurely or varied substantially in some circumstances.

Choice of investment fund
There is an extensive range of funds available which are suited to individuals investment requirements.

Managed/balanced funds
The main investments are normally equities, but managed funds also have significant holdings of fixed-interest securities and some cash deposits. They offer the opportunity to benefit from a well-diversified portfolio, where the investment manager may make some adjustments to their asset allocation according to the prevailing market conditions.

• Managed funds are typically the biggest funds of insurance companies and are often regarded as the flagship funds in terms of investment performance.
• They are usually less volatile than equity funds, because of the level of property and fixed-interest investments that they hold. Managed funds generally under perform equity funds, but over the long term they often perform better than property or fixed-interest funds.

UK equity funds
UK equities have performed very well over the long term, although there have been many periods of short term fluctuation. UK equities have a number of advantages as investments:

• The UK stock market is one of the largest in the world; it is well regulated and there is a well-developed culture of shareholder value.
• UK equities provide generally higher yields than are available from most major markets and may yield more than many deposit accounts.
• Most major UK companies are global businesses, with a substantial international exposure.

International funds
The main advantages of investing overseas are:

• Globally spread investments should be less volatile than purely UK portfolios. The economies of the world are often at different stages in their investment cycles. By investing in different markets, you can smooth out the overall volatility of their investments.
• Many of the world's best companies are located in other countries; by confining your investments to the UK, you could be missing valuable opportunities. In particular, the UK market has little or no exposure to certain types of businesses, such as computing or automobile manufacture.
• In general, there have been some economies that have grown consistently faster than the UK.

International funds include, European, Far East, American, Japanese, Emerging markets and Pacific Basin funds .

Funds that are invested wholly or partly outside the UK may be affected by exchange rate fluctuations.

Multi-manager funds
Multi-manager funds provide you with access to a range of investment managers under the umbrella of a single fund. This has a number of advantages, including:

• The selection of the investment fund managers is made by a professional who is skilled in fund manager selection. You therefore benefit from two layers of management expertise as well as considerable diversification.
• The performance of the chosen managers is regularly monitored and, if their performance is not acceptable, they are replaced.
• The fund is normally able to negotiate special terms that are not available to individual investors.

Gilt and fixed-interest funds
Gilt and fixed-interest funds invest in government and commercial securities that pay a fixed return. They generally provide a stable income that is reinvested in the fund to generate growth. Fixed-interest funds rise in value when interest rates fall and are vulnerable when interest rates rise. In general, fixed-interest funds are less volatile than equity funds, but they have tended to provide a lower rate of long term growth.

Property funds
One of the few ways to have a holding in a portfolio of good quality and diversified commercial properties is through a property fund. Property generally provides long term growth in both income and capital and is less volatile than equities although in the long term, property has generally lower returns than UK equities.

Index-tracking funds
Index-tracking funds aim to shadow the performance of a particular index as closely as possible. Index-trackers have several important advantages:

• Relatively few active fund managers consistently outperform the index against which they measure their performance.
• Even where they do outperform, it is generally achieved by taking higher risks.
• Index-tracking funds generally make lower charges than actively managed funds. Over the years, this can make a significant contribution to fund performance in itself.

Actively managed funds
Actively managed funds can provide outstanding returns:

• They can and do outperform the indices against which they are measured, even though they may not do so all the time.
• By definition, an index-tracking fund will under perform the index it is tracking because of the impact of charges.
• Actively managed funds can provide a higher yield and exposure to markets such as a mix of fixed interest and equity based funds.

With profits fund
These should provide a reasonable level of medium term growth with less volatility than if the plan were to be invested in most other investment funds. They should remember that although bonuses cannot be taken away, the company could apply a market value reduction factor in adverse market conditions and this would affect the value of their investment if they switched or cashed the funds to provide retirement benefits while it was applied. Terminal bonuses also depend on market conditions and are generally more volatile than regular bonuses. Terminal bonuses are not guaranteed.

Bonus warning
The return also depends on the company's policy about distributing profits, in particular where policies are cashed early, in times of adverse market conditions or in other circumstances.

Companies provide a document called "Principles and Practices of Financial Management" which should be considered before investing or changing a With Profit investment.

Protection of contribution
If you were unable to work as a result of disability or illness, you may become unable to continue contributions to your pension plan. To protect your retirement benefits, you can arrange a waiver policy alongside your pension plan that can provide payments direct to your pension provider in the event of illness or disability. These payments would be maintained as long as your disability continued, up until a designated retirement age.