What is a private pension?
A private pension, or personal pension, is a type of pension that you arrange yourself and is one way you can start saving for retirement. You will pay into it, either in regular instalments or in lump sums, and this money will then be invested into a variety of funds.
Typically, providers will also offer plans that move your funds into lower-risk investments as you approach retirement age to minimise the chances of them dropping in value just when you want them. Depending on the provider and the type of pension, you will have some control over where your pension funds are invested.
If you are a basic-rate taxpayer, you can get 20% tax relief on your pension contributions. The provider will claim this tax relief for you. If you’re a higher-rate taxpayer, you will be responsible for claiming the extra tax relief through a Self-Assessment tax return.
Pension providers will only allow you to withdraw from your pension once you reach 55, except in a few exceptional circumstances. But this age limit will change, as the government announced plans to raise the minimum age you can start accessing your pension to 57 in 2028.
When you want to cash in your pension, you can choose from one or more of the following ways. You can take out lump sums from your pension as you need them, opt for pension drawdown which allows you to draw an income and keep the rest of your pension invested, or buy an annuity.
You can take out 25% of your total pension pot without paying any tax.
» MORE: What is a personal pension?