What is a private pension?

Ollie Bryden | 07/07/2019


A ‘private pension’ might sound terribly secretive, but it’s actually a broad term which covers both workplace pensions arranged by your employer, and personal pensions which you set up yourself.

Here, we explain everything you need to know about private pensions.

How do private pensions work?

Private pensions, often referred to as personal pensions, provide a way for you to save for retirement, so that you’ll have an income to supplement the amount you’ll receive from the state pension.

They are generally defined contribution plans, which means any payments you make are invested. The amount you end up with at retirement depends not only on how much you’ve paid in, but also on how your investments have performed and the level of charges.

If you have a workplace private pension, both you and your employer will make contributions, boosting the amount you end up with at retirement.

Do all private pensions benefit from tax relief?

Yes, it doesn’t matter whether you belong to a company scheme or a personal pension, you’ll still be entitled to tax relief on your contributions.

For basic rate payers, a £100 contribution to your pension will only cost you £80 thanks to 20% tax relief. Higher tax brackets will receive an even larger percentage of relief, with those paying the higher rate able to claim a total of 40%, rising to 45% for those paying additional rate tax.

Why would I choose a personal pension over a workplace pension?

Not everyone has access to a company pension scheme, so personal pensions are often an option chosen by the self-employed, or by those who are contributing to a workplace pension but want another pension to provide them with additional benefits in retirement. Your employer can also contribute to a personal pension.

Personal pensions may also be used by people who perhaps have joined several company schemes over the years, and who want to consolidate them into one plan so their retirement savings are easy to manage. You can read more about how pension consolidation can benefit you in our blog ‘Should I consolidate my pensions?’

There’s no restriction on the number of pensions you can belong to, but there are limits on how much you can pay into them. For example, you can only claim tax relief on contributions of up to 100% of your income or £40,000 in the 2019/20 tax year, whichever is lower.

What can I with the money in my private pension at retirement?

Pension freedom rules introduced in 2015 mean there is now a much wider range of options when it comes to using your pension to provide you with an income at retirement. Once you reach the age of 55 (rising to 57 from 2028), you can take 25% of your pension tax-free. You can then either use what’s left to buy an annuity, or income for life, or leave the remaining money invested and draw an income as and when you need it, or you can go for a mix of these options.

You can take your whole pension in one go if you want to, but only the first 25% will be tax-free so you could face a steep tax bill on the remaining 75%. Seek professional advice if you’re not sure which route to choose. You can find out more about taking money out of your private pension in our blog on accessing your pension.

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