Pension schemes

Investment company pension schemes can be one of the lowest cost personal pensions available. The charges are simple to understand, and plans are available from a few fund management groups.

You get tax relief on your pension payments at the highest rate of tax you pay. The gains made by the fund are tax-efficient, and you’re allowed to take up to a quarter of it as a tax-free lump sum when you retire.

A few fund management groups offer investment company pension wrapper schemes. You can usually choose to make contributions into one or more of the companies they manage.

Or you can take out a self invested personal pension (SIPP), offered by some investment managers, stockbrokers and financial advisers. SIPPs give you even greater freedom to choose the investments that go into your pension.

In April 2006 the Government's pension simplification process took place. Investors are now able to hold a wider range of assets in their Self Invested Personal Pension (SIPP) and everyone is able to take out a SIPP in addition to any other pension they may have.

You can pay in as much as you like into all your registered pension schemes but there will be limits on the amount of tax relief given. You can get tax relief on contributions of up to 100% of your UK earnings if you are a UK taxpayer. Any contributions (including any by your employer) above the annual allowance, which is £235,000 in the 2008-09 tax year, will be subject to tax, currently 40%. This annual allowance will increase each year until 2010 when the position will be reviewed.

The lifetime allowance you can accumulate, free of tax, in all the pension schemes you have is £1.65m in 2008-09. You will have to pay tax on any excess over the £1.65m allowance. This is set to rise in stages to £1.8m by the tax year 2010-11. Any combined pension pot that exceeds the lifetime allowance will be liable for a 55 percent tax charge on any surplus.

Since 2001 it has been possible to start a pension for a child. In most cases, contributions of up to £3,600 gross can be made to a child's pension each year. Investment trusts, given their low charges and long-term performance, are particularly suitable for this purpose.

As investment companies on average have strong returns over the long term, they can be a very good choice for funding a pension. You should always seek advice with regard to retirement planning.

For further information on the pension changes please visit the FSA website. The FSA website has been developed to provide impartial information on the changes and set out how people can review their pension arrangements.

Pension scheme providers usually make an additional charge to cover the costs of administering the scheme. These costs will be detailed in the provider's literature, and you should investigate the total costs involved before investing.

The levels of and reliefs from taxation are subject to change and the value of any relief depends on your individual circumstances. HM Revenue & Customs law and practice can change over time and investors who are unsure as to their tax status should obtain independent advice from a professional adviser such as a solicitor, accountant, stockbroker or independent financial adviser. The information on this page is believed to be correct at the time of writing.