What is a private pension?

Find out how to save up additional money for your retirement with a personal pension.

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A private or personal pension is set up on your own. It’s separate from your state pension and any workplace pension. For some people, such as the self-employed, a private pension may be their only option.

But even if you already have a workplace pension, you can also set up a separate private pension to give you a little more to fund your retirement. Saving extra into a private pension can have some decent benefits, the main one being the tax breaks that apply to all pension contributions.

Read on to find out more about what a private pension is and whether you should consider opening one.

What is a private pension?

Unlike workplace pensions, where the scheme is selected by your employer and you’re usually automatically enrolled unless you opt out, private pensions are a personal choice. You choose the scheme plus how much and how often you contribute (some providers have minimum contribution levels). It’s up to you whether you want to manage your pension yourself or have someone else manage it for you. Private pensions are always defined contribution pensions as well. With these schemes, your contributions are invested and the pot you retire on will depend on the performance of your pension investments.

What are the benefits of a private pension?

There are a few plus points to saving for your retirement via a private pension.

  1. Tax relief. The government wants to encourage people to pay in to a pension. So, you don’t pay tax on your pension contributions (up to a certain level). How this works in practice depends on the scheme and your marginal income tax rate. We explain this in more detail below.
  2. Choice of pension scheme. If you’re employed, you’ll be enrolled into the pension scheme selected by your employer. With a private pension, you can choose which pension scheme to use. If you opt for a self-invested personal pension (SIPP), you’ll also have control over exactly where your money is invested.
  3. How much you pay in. With workplace pensions, the amount you need to contribute will be set by your employer as a percentage of your salary (5% is typical). With private pensions, you can usually choose how much and how often you pay in.

Are there any drawbacks to a private pension?

Tax breaks make private pensions a good way to save for retirement. But if you have the option of saving into a workplace pension, you’re usually best off maxing out your contributions to that first. Workplace pension contributions get the same tax relief as private pensions. Plus, there are a few other ways in which private pensions aren’t quite as good as workplace pensions.

  1. You won’t get employer contributions. If you’re enrolled in a workplace scheme, both you and your employer will usually contribute to your pension. Private pensions are funded purely by personal contributions.
  2. Type of pension. Private pensions are always defined contribution pensions. With these pensions, the value of your pension when you retire will depend on the amount you pay in and the performance of your pension investments. While many workplace pensions are also defined contribution pensions, some employers offer defined benefit pensions. With defined benefit pensions, you get a guaranteed income for life based on a proportion of your salary. These schemes are usually more valuable than defined contribution pensions.
  3. Charges are likely to be higher. Workplace pensions come with lower charges than private schemes. By law, there’s a 0.75% cap on the maximum default fund charge for workplace pensions (that’s the charge that’s applied if you don’t proactively choose a different fund than the default). And employers are often able to negotiate even lower charges.

How do private pension tax breaks work?

As long as you don’t pay more than a certain amount per year towards your pension (across both workplace and private pension schemes), the contributions you make usually aren’t taxable. Exactly how this works depends on the scheme and whether you’re a standard or higher-rate taxpayer.

Most private pension schemes use something called “relief at source”. Your pension contributions are paid from your income after tax. The pension provider will claim 20% in tax relief from the government and add this to your contribution.

This tax relief means that your contribution to the scheme will be topped up by 25%. So if you’re a basic-rate taxpayer and pay £200 into your pension, your pot will actually go up by £250. That £50 extra equates to 20% of the total £250 contribution, the same amount that you paid in income tax.

If you’re a higher-rate taxpayer, you can claim back the extra tax relief through your tax return (if you complete one) or directly from Her Majesty’s Revenue and Customs (HMRC). You’ll also need to take this approach if your scheme doesn’t automatically apply relief at source.

It’s worth bearing in mind that you only get tax relief on money you pay into pensions. When you start to receive your pension, you’ll pay the normal rates of tax on any income that exceeds tax-free allowances.

Find out more about tax relief including limits on how much you can pay into a pension and still benefit in our full guide to whether pension contributions are taxable.

Who are private pensions best for?

Zoe Stabler

Finder expert Zoe Stabler answers

As we’ve highlighted above, private pensions have a few downsides compared with workplace pensions, one of which is you won’t benefit from employer contributions. So, given the choice, it’s usually best to prioritise paying into a workplace pension over a private one. You may be able to make higher contributions to a workplace pension than the default amount, and with some schemes your employer may also increase its contributions if you do so. So it’s well worth exploring this option first.

But not everyone has the option of paying into a workplace pension. If you don’t, and if you don’t want to be reliant on the state pension to get by in retirement (currently worth just over £9,350 a year), you’ll need an additional source of retirement income. And the tax relief on pension contributions means that even without employer contributions a private pension is likely to be the best choice.

It’s well worth looking into opening a private pension if:

  • You’re self-employed (full- or part-time). When you’re fully self-employed, you don’t get access to a company pension, so you’ll need to save for retirement yourself. And if you only work for a company part-time, you may feel that your workplace pensions contributions aren’t quite enough.
  • You don’t meet the minimum earning requirements for a workplace pension. If you earn less than a certain threshold (£6,240 for the 2021/2022 tax year) your employer doesn’t have to enrol you in its pension scheme.
  • You’ve taken a break from work to raise a family or for other reasons. If you’re not currently working but have the ability to pay into a pension, a private pension could ensure your pot keeps building up.
  • You work abroad. If you’re temporarily working abroad, but plan to return to the UK, you may wish to contribute to a private scheme in the UK. This may depend on the pension arrangements of the company you’re working for.

What are the different types of private pension?

There are 3 main types of private pension: standard personal pensions, stakeholder pensions and self-invested personal pensions (SIPPs). They vary in terms of charges, range of investments and the level of control you have over investments.

We’ve highlighted some of the key differences between SIPPs and standard personal pensions in the table below. Stakeholder pensions are similar to standard personal pensions, but there are strict government rules on the maximum levels of charges and how they’re managed. Investment options may be more limited too.

SIPPsPersonal pensions
Who’s it suited to?Suitable if you’re more experienced in investing and know how to make investment decisions.Suitable for those with less experience in investing.
Investment choiceChoose your own investments – you can choose from a much larger range of investments than you can with a personal pension, including trusts, government securities, commercial properties and stocks and shares.Choose a fund or selection of funds that broadly match the investment strategy you are looking for. Some personal pensions give you more freedom to choose, which blurs the lines a little.
Who manages it?You manage your investments yourself or hire an investment manager to do it for you.The specifics of your investments are managed by the pension provider.
How much does it cost?Typically higher charges than standard personal pensions.Different funds typically charge different amounts, but this tends to be less than for SIPPs.
Find out moreBest SIPPsBest personal pensions

Are private pensions expensive?

Whatever scheme you join, you’ll need to pay fees and charges. Workplace pensions may have lower charges than personal pensions because your employer may be able to negotiate better terms in exchange for effectively “bulk buying” from the provider. There is also a cap on charges if you’re on the default fund in a workplace pension.

But that doesn’t mean that all private pensions are expensive. The level of charges can vary significantly, so it’s worth comparing these when you’re choosing a scheme. High charges can eat into the final value of your pension pot. Look out for annual management or service charges as well as trading charges and exit fees in case you want to be able to transfer your pension at a later date. Charges for SIPPs tend to be more expensive than for standard private pensions because of the wider choice of investments available and the greater likelihood that you’ll be buying and selling shares regularly.

When can I open a private pension?

You can open a private pension and pay into it at any point. You can be making contributions into a workplace pension at the same time, if you wish.

Which providers offer a private pension?

Most mainstream pension providers and some newer, digital-focused challengers offer private pensions.

If you’re after a SIPP, you can choose between a DIY online investment platform, a robo-advisor SIPP provider or a full SIPP provided by a specialist firm that also offers advice. Check our full guide to SIPPs for more information on your options and which providers offer them.

How do I choose the best private pension?

There are a few things you’ll need to consider when choosing a provider for your pension. Here are some of them:

  • Do I need a SIPP? If you think you’ll want a broader range of investment opportunities, then you may want to choose a SIPP. We compare these pension types above.
  • Fees and charges. Compare how much each provider will cost you based on how much you are investing.
  • Exit fees. You only need to consider this if you think you might want to transfer out at any point.
  • Mobile app. It’s not essential for the provider to have a mobile app, but it’s nice to check in from time to time.
  • Portfolios available. Providers will have different amounts of portfolios available. It’s nice to have choices, so typically, more means better.

When can I withdraw money from my private pension?

You can start withdrawing money from your pension from the age of 55. You can take out 25% of your pension pot as a tax-free lump sum. Anything more is subject to regular income tax.

How can I access the money in a private pension?

Once upon a time, most people with a defined contribution pension had little choice but to buy an annuity with it. An annuity is a form of insurance that translates the value of your pension pot into a regular income for life or for a fixed period. The income is rarely as high as you’d get from a defined benefit workplace pension, but it can still be a good option for some people.

In 2015, there was major overhaul of the pension withdrawal rules (often dubbed “pension freedoms”), which gave pensioners much more flexibility. Now, while you can still choose to buy an annuity with some or all of your pension pot, you have several other options too. Anything other than the initial 25% you can take tax-free is liable for income tax.

  • Take out 25% of your total pension pot (including private and workplace pensions) as a tax-free lump sum.
  • Take the whole pot out and do with it as you wish.
  • Withdraw lump sums as and when you need them, leaving the rest invested. If you choose this option rather than withdrawing 25% as a single tax-free lump sum, the first 25% of each smaller lump sum you withdraw will be tax-free.
  • Leave most of the money invested and take a regular income, known as pension drawdown. This has become one of, if not the, most popular pension withdrawal options.

Can you transfer a private pension?

Yes. If you’re no longer satisfied with your private pension scheme, you can transfer it into another pension. This can be either an entirely new pension scheme or another existing scheme (provided it accepts transfers in). Reasons for transferring a private pension might include the following:

  • You have multiple pension pots and want to consolidate them into a single scheme to help you keep track and manage your pension.
  • You’re not happy with the annual charges being applied by a private pension scheme and want to move to a scheme with lower charges.
  • An existing private scheme is closing.

If you want to transfer a private pension, make sure to check for any fees for doing so. These may be exit fees on the existing scheme, or set-up fees on a new scheme. Not all schemes apply these fees, but if they do it could wipe out some of the benefits of transferring.

Can I have a private pension as well as a workplace pension?

Yes. Even if you have a workplace pension, there’s nothing stopping you also paying into a personal pension. However, as we’ve outlined above, in most cases you’ll be better off maxing out payments into your workplace pension before you contribute to a private pension.

Is the money I hold in a private pension safe?

Registered private pension schemes in the UK are regulated by the Financial Conduct Authority (FCA). This means 2 things.

First, it means that there are strict rules about how schemes must operate and manage pension plan investments, including the systems and controls they must have in place to protect your investments.

Second, it means that you have protection under the Financial Services Compensation Scheme (FSCS) if either your pension provider or one of the investment companies that your pension is invested in goes bust. If necessary, this allows you to claim back up to £85,000 for each investment institution that fails. If your pension provider itself fails, the FSCS aims to make sure you get back 100% of any loss. Bear in mind that the protection is in place to mitigate against worst-case scenarios, rather than the standard risks that apply to all investing. It won’t generally cover against (hopefully short-term) losses due to volatility in pension investment markets.

Where can I find advice on private pensions?

Choosing a private pension is something you don’t want to get wrong. If you’re not that experienced or comfortable making big financial decisions, there is help available. For free, general pension guidance (on the types of pension available, for example), you can contact the government’s MoneyHelper experts online or by calling 0800 011 3797. Or, if you want personal advice that’s tailored to your specific needs and circumstances, you can pay a regulated financial adviser. Directories that can help you search for a regulated financial adviser based on what you’re looking for include the MoneyHelper website, the Society of Later Life Advisers, the Personal Finance Society and Unbiased.

Pros and cons

Pros

  • You receive tax relief on contributions
  • Choice over the pension provider and, with SIPPs, the specific investments
  • Contribute at a level and frequency that suits you

Cons

  • Charges are often higher than for workplace pensions
  • No employer contributions
  • If you act without financial advice, you’re accountable for any poor decisions

Bottom line

If you have access to pension through your employer, its contributions and the (typically) lower pension charges mean that you should prioritise paying into your workplace scheme. But if that’s not an option, or you want to pay more into a pension than your workplace pension allows, the tax relief on contributions means that a private pension can give a valuable boost to your retirement plans.

Have a look at our table of private pension providers to compare them.

Frequently asked questions

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