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.

How personal pensions work

With a personal pension, you pay a regular amount, usually every month, 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.

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.

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' £235,000 for the 2008-2009 tax year. Savings above the annual allowance will be subject to a tax charge.

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 2008-2009 is £1.65 million, gradually rising to £1.8 million by 2010-2011.

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 was £16,500 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. The limit will gradually rise each year to £18,000 by the 2010-2011 tax year

How much you can afford to save for your pension

how much you will get from other pensions when they become due
Working out the value of your other pensions
The amount of basic State Pension you get depends on the National Insurance contributions you paid, are treated as having paid or are credited with throughout your working life.

The amount of additional State Pension you receive is based on your earnings and National Insurance contributions as an employee. (You can't build up entitlement to the additional State Pension when you are self-employed.)

If you have a company pension your employer should be able to tell you how much you're likely to get.

You can take out a personal pension, including a stakeholder pension, to top up an occupational pension, but first check if your employer provides a more cost-effective way of topping up contributions, through 'Additional Voluntary Contributions' (AVCs).

Is a personal pension right for you?

Personal pensions are suitable for:

- people who are self-employed
- people who aren't working but can afford to pay for a pension
- employees whose employer doesn't offer a company pension scheme
- employees who do not pay into a company pension
- employees on a moderate income who wish to top up the money they would get from a company pension

However, if you have moderate earnings, or think you might need to stop and start payments, or vary the amount, you might want to consider a stakeholder pension. A stakeholder pension is a flexible type of personal pension

A personal pension may not be the best choice if:
your company offers an occupational pension scheme
your employer offers a Group Pension Plan