Get personal - and enjoy the tax advantages

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The Independent Online
A personal pension attracts tax advantages. So, while you will not have an employer contributing, the Government in effect does. For every pounds 76 you put into a personal pension in the current tax year, the Government adds another pounds 24 to make it up to the round 100. With the basic rate of income tax falling to 23 per cent next April you will have to put in pounds 77 to have the Government's contribution of pounds 23 to make it up to 100. But if you are in the 40 per cent tax bracket, for every pounds 60 you put in your pension, the Government will add pounds 40, and that is not set to change next year.

You can pay in monthly amounts, or put in a larger lump sum into a personal pension once a year. It is up to you. You can make contributions according to your lifestyle. So if you are self-employed and receive a lot of payments in, say, March, then that would be a good time to add cash to your pension scheme while you are relatively cash-rich.

Even if you have a particularly bad year that need not have a negative effect. The Inland Revenue allows you to catch up on previous years' pensions contributions - you can put in the maximum allowable amounts up to six years later - which means you can simply take a holiday from pension payments one year and catch up when you can afford it.

Also you do not have to put all your personal pension cash in just the one fund. You can spread your investment around: spreading the risk among different pension providers, and investing in a range of different funds. However, it may be unwise to spread your investment pots among too many different providers because of the effects of charges and commissions on your investment.

If you only put a small amount into a personal pension fund, its value could be seriously affected by charges.

Finding the right investment for your pension planning is important. There are high-risk and low-risk opportunities and it is possible to mix and match to get a good mixture of both, professional advice will help.

There are some simple rules you should follow when considering any investment, particularly something as important as your pension. You should be looking to invest with companies you can trust. You should be comfortable that their financial strength is sound but you should also be looking for companies with good performance records. Charges will also come into the decision- making process - bear in mind that the higher the charges, the less money that there will be actually invested on your behalf.

Most personal pensions are operated by life companies, although other financial institutions have been getting in the act in recent years, including unit trust groups, friendly societies, and banks through their own life company subsidiaries. Charges vary but often include initial charges, annual management fees, and monthly administration charges. An annual 1 per cent management charge may seem small at just pounds 10 for every pounds 1,000 in your fund. But that soon grows to a make a major dent in your pension pot.

There are limits as to the amount you can contribute each year to a personal pension. Up to the age of 35, you can put in up to 17.5 per cent of your net income. At age 36 this rises to 20 per cent and then rises a further 5 per cent each half decade until by the time you've reached the age of 61, you will be allowed to put in up to 40 per cent of your earnings into a personal pension.

All contributions qualify for full tax relief and any growth in a fund is free of tax, which makes a personal pension one of the most tax-efficient ways of investing there are.

There are rules limiting what you can take out at retirement. This is in effect the deal you make with the Government - it gives you the preferential tax treatment so that in return you fund yourself in retirement. You can take out a lump sum from your pension pot when you can retire, which in simple terms is roughly equivalent to 25 per cent of the fund, but the rest must be used to buy an annuity to give you a retirement income.

The income you receive from an annuity must not be more than two-thirds of your final salary and so keeping regular checks on your pension fund performance as you approach retirement is sensible. You will get annual statements from your pension provider that will help give you an idea whether you need to increase your contributions, within the limits, to reach your pension target.

For most of us pension planning is likely to be a 30-year business. Decisions made now may need to be revisited in five, 10 or 20 years as circumstances and needs change.