Personal Pensions

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Read our beginners’ guide to pensions and retirement where we explain the different pension savings options and how to make the most of your money when you retire.

Pension plans can be one of the most tax-efficient ways of saving for retirement.

The Government will normally give you tax relief that may help increase the value of your plan. If you're a basic rate taxpayer and pay £80 into your plan each month, the Government will automatically top up your investment with an additional £20.

There might be further tax relief if you're a higher or additional rate taxpayer. You can claim this when you fill in your annual tax return, or by writing to your Tax Office.

Work out how much you could save in tax relief when paying into a pension.

There are other tax advantages offered by a pension plan –

• Investments in pension plans are generally free of UK income and capital gains tax, although we can't reclaim tax deducted at source from the dividends of UK company shares.
• When you retire you can normally withdraw up to 25 percent of the value of your plan as a tax free lump sum, although remember that your retirement income will be liable to income tax.
• If you die before you retire, no inheritance tax will normally be payable on the value of your plan, although any dependants' income will be liable to income tax.

The value of the tax benefits of your plan depend on your individual circumstances. Your circumstances and tax rules may change in the future.

If you change jobs, become self-employed or leave paid employment then you simply take your plan with you. In most cases, you (and your new employer if you have one) will be able to continue making payments to your plan. Please note that, regardless of whether you are earning or not, there will be a limit to how much you can pay.

At your selected pension date, you have a number of options to choose from. You don’t need to make any decisions now, but when you do, you will probably want to discuss your options with a financial adviser.

• You can use your fund to provide an immediate pension, giving you a regular taxable income for life.
• You can normally take up to 25% of your fund as a tax-free cash lump sum, using the balance of your fund to provide a (reduced) regular taxable pension for life.
• You can give up part of your pension, to provide a taxable pension for your husband, wife, registered civil partner or other dependant after you die. You can choose whether you want your pension to remain level throughout your life or to increase automatically each year.
• You can delay buying your pension, but still take a taxable income by moving to Income Drawdown.

You can increase the amount you pay at any time. You can even stop making payments if your circumstances change, although you should always discuss this decision with your financial adviser as it is likely to mean less money is available when you take your pension. You can request an illustration from us showing the effect of reducing or stopping your payments.

Like most private pensions, we charge for managing and investing your plan. The amount we charge depends on your choice of investment fund(s). Details of the charges can be found in the product literature. There are no separate initial set-up charges.

Your payments into a Personal Pension usually qualify for full income tax relief at the highest rate you pay. Any payments that exceed your taxable earnings (or £3,600 if higher) will not qualify for tax relief. Similarly payments by your employer, or any funds that you transfer in from another pension scheme, will not qualify for tax relief. Here’s how it currently works if you choose to pay £100 a month (gross) payment:

If you are a basic rate tax payer

If, for example, you make a net payment of £80 a month to your Personal Pension plan. HM Revenue and Customs will top it up with an additional payment of £20. You now have £100 a month going into your pension plan.

What you pay: £80
Add tax relief: £20

Total going in to your pension: £100

If you are a higher rate tax payer

If, for example, you pay the same £80 you’ll get the same automatic £20 top-up. You then claim the difference between basic and higher rate tax relief in your self-assessment tax return. This is currently £20, so your £100 gross payment effectively costs you only £60 under current tax rules.

What you pay: £80
Add automatic tax relief + £20
Additional tax relief you reclaim: £20
Net cost to you: £60

Total going in to your pension: £100

The tax treatment depends on your individual circumstances and may be subject to change in the future. Tax rules can change.

An additional income tax rate of 50% applies to incomes over £150,000.

What you get will depend on what you put in, how long you keep making payments, how investments perform, the tax treatment of your plan and annuity rates when you choose to take your benefits.

You can normally choose your retirement age – anytime between the ages of 55 and 75. Once you’ve decided how much income you think you’ll need and when you want to take it, you can work out how much you might need to save to reach your retirement goal.

Use our simple Pension calculator to plan your retirement.

There is no absolute upper limit on the payments that can be made to your pension plan each year.

However, no tax relief is available on any payments you make that exceed your relevant UK earnings, or £3,600 (gross) if higher. Scottish Widows cannot accept any payments from you that do not qualify for tax relief.

In addition, an Annual Allowance applies to the amount of payments made to your pension plan each year. If the payments made to your pension plan in any year exceed the Annual Allowance, you will be liable to pay a tax charge on the excess. The Annual Allowance for the 2011/2012 tax year is set at £50,000.

A Lifetime Allowance, also set by the Government, applies to the total value of pension benefits you can receive from all your pension plans. A tax charge must normally be deducted from any benefits that exceed the Lifetime Allowance, before they can be paid. The Lifetime Allowance for 2011/2012 tax year is set at £1.8 million.

See our Key features for more information on tax relief, the Annual Allowance and the Lifetime Allowance.

The tax treatment depends on your individual circumstances and may be subject to change in the future. Tax rules can change.

You can decide to take your Personal Pension benefits any time between age 55 and 75, even if you’re still working. However, you can transfer to another pension arrangement if your wish to take your benefits later than age 75.

At your selected pension date, you have a number of options to choose from. You don’t need to make any decisions now, but when you do, you will probably want to discuss your options with a financial adviser.

• You can use your fund to provide an immediate pension, giving you a regular taxable income for life.
• You can normally take up to 25% of your fund as a tax-free cash lump sum, using the balance of your fund to provide a (reduced) regular taxable pension for life.
• You can give up part of your pension, to provide a taxable pension for your husband, wife, registered civil partner or other dependant after you die. You can choose whether you want your pension to remain level throughout your life or to increase automatically each year.
• You can delay buying your pension, but still take a taxable income by moving to Income Drawdown.

The full value of your pension plan will normally be used to provide a cash lump sum for your dependants.

Normally, no Inheritance Tax is payable on the value of your plan. However, if your plan is used to provide a lump sum death benefit, any amount in excess of the Lifetime Allowance (currently £1.8 million) may be subject to a tax charge. There’s normally no charge if the excess is used to provide a pension for your husband, wife, registered civil partner or dependants (note that such pensions are treated as earned income and could be taxed in payment).

When your plan is set up, you will receive your policy documents followed by a personalised Illustration based on your chosen payments, fund choices and selected pension date. This will show you what you might expect when you take your pension if certain growth rates are achieved.

Every year, we’ll send you an updated pension benefits statement which shows the value of your plan and what you might get back, provided certain assumptions are met. You can also keep track of your pension online, as well as checking daily fund prices.

We hope you have found this summary of frequently asked questions helpful. If you have any further questions please contact us.