Conventional Personal Pensions

Unlike stakeholder pensions, conventional personal pensions do not have restrictions on the amount that can be charged, or minimum standards of access and flexibility.

Otherwise they are quite similar. They allow you to set up your own fund if you cannot or do not pay into an occupational pension scheme. It can move with you from job to job.

Paying money in

You usually pay into the personal or stakeholder pension every month, and if you are an employee, your employer can also contribute to your pension. The money in your pension fund is invested to pay for a regular income when you are older. But it is alos used to pay the charges to your l pension provider.

Some pension schemes allow you to change the amount or frequency of your payments but you may have to pay extra charges for this. You can also get single premium personal pensions that allow you to pay in a single lump sum, or a series of lump sums. Charges for these personal pensions may be lower.

You will usually get tax relief on your contributions to a stakeholder or personal pension which is the Governments way of encouraging us to save towards our own retirement. This tax relief is available to everyone who pays into a stakeholder or personal pension, even those who do not pay tax. With a basic rate of income tax of 20%, every £100 that goes into your pension costs you £80 (based on the tax year 2008/09). If you pay income tax at the higher rate of 40%, you can claim back the tax difference (compared with the basic rate of income tax) from the Inland Revenue. So, with the higher rate of income tax at 40%, every £100 that goes into your pension fund costs you £60 (based on the tax year 2008/09).

You may be able to contribute to a personal pension or a stakeholder pension as well as an occupational pension but this will depend on your income and the amount of contributions you currently pay.

What happens when you retire

While you are working, the pension fund is invested and grows over your lifetime. On retirement, you can take up to 25% of your fund as a tax-free lump sum and the remainder is used to buy something called an annuity to provide an income.

A good stakeholder or personal pension plan will give you the option of retiring when you want to - usually any time between the ages of 55 and 75 - without penalties. It will also allow you to be flexible in phasing out your work gradually, rather than stopping suddenly. And it should allow you to reduce or suspend your contributions if needed.