Individual Pension

Individual pensions are pensions taken out by individuals to provide for themselves (and optionally their dependents) in retirement. Individual pensions (which means Personal Pensions and Stakeholder Pensions) are Money Purchase style pensions, i.e. money (contributions) are paid into a fund, this fund is then invested in some way and the proceeds are used to purchase an annuity (a regular income) at retirement.

So there essentially three things to understand

1. the individual (it is possible for a company to make contributions into an individual pension for its employees but it is under no obligation to) pays contributions into a fund (normally on a monthly basis although lump sums can also be paid in). The exact way in which the level of contributions is decided should be with the help of a professional financial adviser.

2. these contributions are invested until the individual reaches retirement. The contributor would normally be in a position to dictate the types of assets in which these contributions are invested.

3. at retirement the fund is used to purchase a pension (technically called an annuity). Some of the fund can also be taken as tax free cash. Again this should be discussed with the contributor’s professional advisor.