Personal Pension Plan (PPP) – A Brief Explanation
Keywords – Personal Pension Plan
A Personal Pension Plan (PPP) is simply a cash pot that employees and employers can pay into as a way to build a retirement fund.
However, more than just a retirement fund, there are added considerations attached to a PPP in terms of your income and spendings in the long term.
The Taxation Benefits
All individuals under the age of 75 are eligible for tax backs on all Personal Pension Plan (PPP) contributions.
This means that every time a contribution is made to your PPP, the Government adds between 20 to 45% to the contributed amount, based on your earnings and tax contributions.
However, this added Government contribution does not apply if your employer is already submitting lower / deducted amount, based on the added contribution proposal from the Government.
In addition, if you choose to ‘sacrifice’ a part of your salary into your PPP, the benefits amplify. For instance, if you are contributing further on your pretax income, you end up paying a lower National Insurance (NI). The same incentive applies to the employer, who also has to contribute less under the proposed circumstances.
In terms of numbers, this means that basic tax payers have to contribute £68 pounds to get a £100, while high band tax payers have to contribute just £58 (40% tax band + 2% lower NI) or £53 (45% tax band + 2% lower NI).
From an investment point of view, a Personal Pension Plan (PPP) is simply a tax-saving scheme.
Generally, the criticism around PPPs comes from ill advised and risky investments.
Therefore, it is important to understand who is managing your retirement fund. Generally, your employer is required to sign-up with a third party company. However, in most cases, you are free to switch to another company or choose a second management company for any added contributions.
As expected, each company may set its own rules.
For instance, most of the PPP managing companies may charge an annual fee. This annual fee can either
- be a round figure, for instance £120/yr at Interactive Investor Pension or £100/yr at Bestinvest. Or
- an annual percentage, for instance 0.4% at True Potential Investor or 0.25% at Sanlam. In some instances, the percentage fluctuates based on your contributions, e.g. Liverpool Victoria charges between 0.1 and 0.15% while Old Mutual Wealth changes between 0.25 to 0.75%.
In each case, generally, you are also given the freedom to split your investments across multiple funds. This means that you are able to choose the level of risk you are taking.
Please be advised that MV Chartered Accountants are not attached with any of the mentioned companies and hence, are not liable to any claimed damages. This article is purely for educational purposes. Please conduct your own research before making a decision on your PPP or get in touch to learn further.
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