What our Nerds say about Pensions
A private pension is a pension you set up yourself to put money aside for your retirement. Having a pension is important because when you reach a certain age, you may want to stop working but you will still need money to live on.
While you may be eligible for a State Pension, if you want a more comfortable retirement with more disposable income, it is wise to also save into a workplace pension or private pension, or both. When you start a private pension for yourself you will be able to choose how much you contribute and how often.
Your pension will then be invested into different funds, with the aim of growing your money, so by the time you retire you have built up a nice nest egg.
Of course, as with all investments, there is a risk that your money could lose value. However, if you start contributing to your pension early, your money has more time to grow over the long term and stands more chance of riding out any short-term falls.
Private pension providers will offer a variety of funds to choose from and you can choose the risk level of your investments. There will often be a default fund for your contributions to invest into if you don’t select an option.
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?
How does a private personal pension differ from the State Pension?
The State Pension is a benefit offered by the government, and the amount you get is determined by the National Insurance (NI) contributions you make during your working life. NI contributions are deducted from your salary along with income tax.
As long as you have the minimum level of NI contributions, normally ten years’ worth, you will be eligible to receive the State Pension.
A private pension is an additional pension you can pay into. Because the State Pension provides a basic income that can only be accessed once you reach State Pension age, many people may want more money to live off in retirement and/or may want to retire before they reach State Pension age. So, by saving into a private pension while you work, you can build up more funds to help you pay for your retirement plans.
What’s the difference between a private personal pension and a workplace pension?
A private pension is a type of pension you will choose yourself. You will decide which provider you use and how much you invest.
A workplace pension is a type of pension that’s arranged by your employer. If you’re aged 22 but under State Pension age and you earn more than £10,000, your employer must automatically auto-enrol you in a workplace pension. However, you can opt-out of a workplace pension scheme.
If you do join, your contributions will be taken directly from your pay so you won’t need to do this yourself. Your employer will also contribute to your pension and you will receive tax relief on your contributions.
Together, you and your employer must contribute at least 8% of your salary to your workplace pension, with the employer paying at least 3%.
If you’re self-employed, you won’t be automatically enrolled into a workplace pension scheme, but you can still claim tax relief by saving into a personal pension.
» MORE: How do workplace pensions work?
What’s the difference between a personal pension plan and a self-invested personal pension (SIPP)?
Self-invested personal pension (SIPP) are a type of personal pension. Although both SIPP and standard personal pensions are designed to help you save money towards your retirement, they differ slightly in the range of choices available to you when it comes to choosing what to invest in.
With a personal pension plan you can select from a range of pension funds to match the risk you are willing to take.
As the name suggests, with a self-invested personal pension (SIPP), you will have more choice over exactly where you invest your pension funds as you will be able to decide for yourself whether to invest your pension in different types of investments that may not be available with a standard personal pension.
How to choose the best pension provider for your needs
When you’re looking for a pension provider, it can be difficult to know which one is right for you. To help you make your decision, you should think about:
- What fees does the provider charge? Look out for administration fees, management fees, and transaction fees. Also, consider the charging structure itself. Is it a fixed fee or a percentage based fee as one may be better than the other for your individual situation.
- Is there a minimum amount you need to invest in the pension?
- What choice of pension funds do you have?
- Can you manage where your money is invested, or do you want the pension provider to manage your funds?
When looking at pensions, be on the lookout for any pension scams that may offer you the chance to access your pension early for example.
If you are unsure about what pension provider to choose, or what type of pension is most suitable, you may want to talk to an independent financial adviser about your options.
» MORE: How to get free pension advice
Pensions FAQs
A pension is a product that you pay into during your working life, which you can use to pay for your retirement. The money in your pension is invested, which over the long-term could give it a chance to grow at a quicker rate than it could in other types of savings accounts, although this is not guaranteed.
A standard personal pension serves as a payment and savings pot, allowing you to put some of your money aside while you work. It is tax-efficient and, upon retirement, can be drawn down directly, or you can exchange the money for a form of annual income called an annuity. Following the introduction of rules in April 2015 by HM Revenue & Customs, you can also take one or more lump sum payments from your pension pot from the age of 55 onwards. Pension providers do not have to offer all these options of accessing a pension fund so always check with your pension provider.
The full new State Pension for 2025/26 pays out £230.25 per week, while the full basic State Pension, which you’ll receive if you reached State Pension age before April 2016, is £176.45 a week. However, this sum could vary, depending on your National Insurance record and whether you deferred claiming your State Pension. You typically need to have a minimum of ten years of National Insurance contributions to receive any State Pension. You receive the State Pension every four weeks.
You will normally be able to start accessing your pension from the age of 55, although this is expected to rise in the coming years. If anyone contacts you claiming to be in a position to help you access your pension pot before reaching the required age is highly likely to be acting fraudulently and should be reported immediately.
You won’t be able to access your State Pension until you reach the State Pension age, as set by the government. Your State Pension age will depend on when you were born, as the government has been increasing the State Pension age to account for the ageing population. Since October 2020 the State Pension age has been 66 for both men and women, but it’s increasing and will reach 67 by 2028. This may well change again; you can check your current retirement age on gov.uk.
As of February 2018, all employees aged over 22 and under State Pension age who earn more than £10,000 a year, are automatically enrolled into a workplace pension scheme. Unless you have chosen to opt-out of your workplace pension scheme, you are likely to have one. If you are unsure, speak to your employer for more information.
The choice is up to you. You may not necessarily need a private pension if you already have a workplace pension, but if you want to save more for your retirement, you may want to open one and make additional contributions.
There are a number of reasons why you may wish to transfer your pensions. These include switching jobs, wanting to find a better pension plan, or just to move your pension pots into one single pension.
Remember, depending on the type of pension you have, transferring them may not always be the right thing to do, for example, if you have a final salary pension. MoneyHelper offers free, impartial guidance to help you determine the steps you need to take, if you wish to transfer your pension plan.
Upon your death, your pension may be redistributed as a form of benefits to any financial dependents you may have chosen. If no dependents are listed at the time of your death, benefits can end up being paid directly to your estate instead. For more information about what happens to your pension when you die you should speak to your pension provider.
Yes, parents and guardians can open a pension for their child. You can invest up to £2,880 a year and get 20% tax relief on this, and the child will gain control of their pension when they turn 18. However, as with other pensions, they won’t be able to withdraw money from their pension fund until they turn 55, or older if the government changes the minimum age in the future.
There’s no limit to the number of pensions you can have, so you can have more than one workplace pension, private pension, or SIPP.
If your provider is authorised and regulated by the Financial Conduct Authority (FCA) you may be covered by the Financial Services Compensation Scheme (FSCS), which means that you may be entitled to compensation should the provider or the firm holding your pension investments goes bust. The same way pensions are complex products so is the protection offered on them to consumers, and these can vary greatly depending on who your provider is and how they hold your funds. Please check the FSCS website for full details of what is covered.
It’s important to stress that even though there may be a certain level of protection for a company becoming insolvent, there is no protection if your investments simply lose value.
Dive even deeper
QROPS Explained: Transferring a Pension Overseas
Guaranteed Minimum Pension Explained – What is GMP?
