A private or personal pension is set up on your own. It\u2019s 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.<\/p>
But even if you already have a workplace pension<\/a>, 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.<\/p> Read on to find out more about what a private pension is and whether you should consider opening one.<\/p> Unlike workplace pensions, where the scheme is selected by your employer and you\u2019re 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\u2019s 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<\/a> as well. With these schemes, your contributions are invested and the pot you retire on will depend on the performance of your pension investments.<\/p> There are a few plus points to saving for your retirement via a private pension.<\/p> 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\u2019re 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\u2019t quite as good as workplace pensions.<\/p> As long as you don\u2019t pay more than a certain amount per year towards your pension (across both workplace and private pension schemes), the contributions you make usually aren\u2019t taxable. Exactly how this works depends on the scheme and whether you\u2019re a standard or higher-rate taxpayer.<\/p> Most private pension schemes use something called \u201crelief at source\u201d. 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.<\/p> This tax relief means that your contribution to the scheme will be topped up by 25%. So if you\u2019re a basic-rate taxpayer and pay \u00a3200 into your pension, your pot will actually go up by \u00a3250. That \u00a350 extra equates to 20% of the total \u00a3250 contribution, the same amount that you paid in income tax.<\/p> If you\u2019re 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\u2019s Revenue and Customs (HMRC)<\/a>. You\u2019ll also need to take this approach if your scheme doesn\u2019t automatically apply relief at source.<\/p> It\u2019s worth bearing in mind that you only get tax relief on money you pay into<\/em> pensions. When you start to receive your pension, you\u2019ll pay the normal rates of tax on any income that exceeds tax-free allowances.<\/p> 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<\/a>.<\/p>What is a private pension?<\/h3>
What are the benefits of a private pension?<\/h3>
Are there any drawbacks to a private pension?<\/h3>
How do private pension tax breaks work?<\/h3>