Personal pensions may be suitable if you're employed and not in a company pension scheme, or as an addition to a company pension. You may also wish to set up a personal pension if you are self-employed or if you are not working but can afford to put aside money for retirement.

With a personal pension you pay a regular amount, usually every month or every year, or a lump sum to the pension provider who will invest it on your behalf. The fund is usually run by financial organisations such as building societies, banks, insurance companies, and unit trusts companies.

The final value of your pension fund will depend on how much you have contributed and how well the fund's investments have performed. The companies that run these pensions charge you for starting up and running your pension. Charges are normally deducted from your fund in the form of fund management charges.

Contribution Levels and Tax Relief

You can save as much as you like into any number and type of pensions. Up to age 75, you get tax relief on contributions of up to 100 per cent of your earnings each year, subject to an upper 'annual allowance' £255,000 for the 2010-2011 tax year. Savings above the annual allowance will be subject to a tax charge. Any employer contributions to your personal pension plan would count towards this annual allowance but are paid gross.

For each pound you contribute to your scheme, the pension provider claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot.

If you're on the higher tax rate of 40 per cent, you'll still get 40 per cent tax relief for any money you put into your pension. But the way that the money is given back to you is different:

• The first 20 per cent is claimed back from HMRC by your pension scheme in the same way as for a lower rate taxpayer.
   
• It's up to you then to claim back the other 20 per cent when you fill in your annual tax return, or, for example, by claiming by letter to your Tax Office.
   
• If you don't pay tax, the most you can pay in with tax relief is £2,880 a year. But you'll still get basic rate (20 per cent) tax relief. In other words the government will 'top up' your contribution so that £3,600 is invested.
• Your pension fund will invest the money you save (including the tax relief amount) in your pension. Your pension fund growth may be free of tax.
• Any rise in the value of the scheme's assets between what you put in and what they're worth at the end is called capital gains and is tax-free.
• Tax relief for those earning over £130,000 will be reduced from April 2011.  Those earning up to £130,000 will receive full relief as at present, those earning over £180,000 will be entitled only to basic rate relief, and those with earnings in between will be entitled to a rate between the basic and higher rates. 
• Special Note on Tax Relief:
  To prevent very high earners from making substantial contributions before April 2011, there will be a ‘special annual allowance’ of £20,000 for those who have total income exceeding£130,000 in the current tax year or either of the two preceding ones.  In broad terms:
   - if there is any single contribution or increase to a regular contribution and the total paid in during the tax year is over £20,000, tax relief is available as normal, but there will be a 30% tax charge on the excess over £20,000; but
  - current regular contribution levels of over £20,000 in the tax year will be eligible for tax relief as normal without any special tax charges, but any increase or single contribution will attract the 30% charge. 
  - for those high earners who have previously made contributions less frequently than quarterly, the ‘special annual allowance’ is increased to £30,000 or the average of the contributions made in the 2006/2007, 2007/2008 & 2008/2009 Tax Years, whichever is the lower with a minimum of £20,000.’

In the year of crystalisation you are able to contribute up to the Lifetime allowance (currently £1.80m), however this will only attract 40% tax relief on 100% of earnings.

Drawing your Personal Pension

You can take up to 25 per cent of the value of your total pension savings from all sources as a tax-free lump sum when you retire, up to a maximum of 25 per cent of the lifetime allowance. The lifetime allowance for the tax year 2010/2011 tax year is £1.80 million.

You then have two broad options:

• Use the rest of the fund you have built up to buy an annuity (a regular income payable for life) from a life insurance company; this does not have to be the same company that you have your pension plan with.
   
• Take an income (taxed at your normal Income Tax rate) from the remainder of your fund while it continues to be invested – as an 'unsecured pension' up to age 75 or an 'alternatively secured pension' once you reach age 75.

If your total pensions savings exceed the lifetime allowance you have two choices:

• If you take the excess as a taxed lump sum, the excess amount is taxed at 55 per cent.
   
• If you take the excess as income, the excess amount is taxed at 25 per cent; income taken from your pension pot will then be taxed at your usual Income Tax rate

If your total pension savings from all sources is £18,000 or less (one per cent of the lifetime allowance) you may be able to take the whole amount as a cash lump sum, with 25 per cent tax-free.

There are more tax advantages to having a pension scheme:

• Your pension fund will invest the money you save (including the tax relief amount) in your pension. Your pension fund growth may be free of tax.
   
• Any rise in the value of the scheme's assets between what you put in and what they're worth at the end is called capital gains and is tax-free.
   
• When you come to take benefits you may be able to draw out up to a quarter of the value of your stakeholder or personal pension fund as a tax-free lump sum. Your pension provider will be able to tell you whether or not you will be able to do this. That lump sum could in turn be used to purchase a tax efficient annuity.

Putting money into someone else's personal pension.

You can put money into someone else's personal pension – like your husband, wife, civil partner, child or grandchild's. They'll get tax relief added to it at the basic rate, but this won't affect your own tax bill. If they've got no income, you can pay in up to £2,880 a year (which becomes £3,600 with tax relief).

For example, if you put £80 into a spouse or civil partner's pension scheme, the government would put in £20, so their pension pot would increase to £100. Your tax would remain the same.