Tax treatment depends on your circumstances and is subject to change

What are private pensions and how do they work?

There are lots of different pensions with a variety of names, so things can get a little confusing. So, what is a private pension?

A private pension is a type of defined contribution pension that you set up yourself. You decide on the scheme, the provider and the contributions you would like to pay, be it regular payments or one-off lump sums.

How do private pensions work?

Private pensions are a type of defined contribution pension. This means that:

  • You receive tax relief on any money that you pay into your pension
  • Your money is invested in the stock market
  • The value of your pot at retirement is dependent on the contributions you have made and the returns you have received on your investments

Private pensions also come with a great deal of flexibility, both when putting money in and when taking it out again at retirement. You decide how much you pay into this pension, which means that you can adjust the amount based on your circumstances. And when you reach the age of 55, you have a number of different options for withdrawing your funds in a way that best suits your needs. Releasing pension money early isn’t right for everyone as it will leave you worse off in retirement.

What is the difference between a private and a workplace pension?

Most workplace pensions are also defined contribution schemes, making them very similar in the way that they work. However, there are a few key differences. If you are aged 22 or over, earn at least £10,000 per year and usually work in the UK then your employer must automatically enrol you into a workplace pension scheme. Whereas a private pension you set up yourself.

With a workplace pension scheme, it’s not just yourself that contributes to the pension, your employer does also. This helps your pension grow further and is effectively free money. Win, win!

Your contributions to a workplace pension are made in one of two ways. Either your employer will take the contribution out of your pay before you receive it, which can reduce the overall tax you pay on your salary. Or your contribution will automatically be taken from your salary after tax, in which case you will receive additional tax relief from the government.

Can I have a private and a workplace pension scheme?

Absolutely. If you have been enrolled in a workplace pension scheme, you can also set up a private pension yourself. This could be a great way to make additional contributions to your pension, either regularly or as one-off payments. This flexibility can come in handy when you have a month with unexpected bills, for example. And because you will receive tax relief on the contributions you make, you won’t be losing out on the income tax you would have already paid on the money.

Types of personal pensions

With profits pension

Group pension plan

Executive pension plan (EPP)

Managed pension

Stakeholder pension (SHP)

Self-invested personal pension (SIPP)

Small self-administered scheme (SASS)

Share this

Thinking about your pension options?

We can help you to make the best possible decisions when it comes to your pension.

Taking pension money early is not right for everyone as it will leave you worse off in retirement. Also, tax treatment depends on your circumstances and is subject to change. That’s why it makes sense to get help from a regulated specialist.

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article.
0800 009 3388
Mon-Fri 9am-5pm

Latest

Pension Access is a trading name of Harbour Rock Capital Limited which is registered in England & Wales as a Limited Company, No. 10290349. Authorised and regulated by the Financial Conduct Authority, No. 754580. Registered Offices: Affinity House, Beaufort Court, Sir Thomas Longley Road, Rochester, Kent, ME2 4FD. Telephone: 0800 009 3388. Email: pensionaccess@harbourrockcapital.co.uk
© 2024 Pension Access. All right reserved.
What's in your info pack?
Your FREE information pack contains all the information you need to make an informed decision on wheter or not taking tax free cash from your pension is right for you.
Get your Free Info Pack
Complete the form and we'll send you an information pack
Note: We are unable to advise on the state pension or any pension you are already taking an income from.

    Get your free info pack

    Where should we send your info pack?

    Please complete your details below and we'll send your information pack in the next available post

    Find Your address

    Type in your postcode or start typing your address then select from the drop-down list

    Your address

    We'll post your information pack here

    Keeping in touch

    We'll send you updates by email or text message. One of our specialists may call, just in case you have any questions about your pension. We’re big believers in never bombarding people with calls.

    Safety PadlockYour information is safe with us. Our calls are recorded for regulatory, legal and training requirements. Please see our privacy notice for information on our data practices here

    PRIVACY POLICY

    Hands using calculator to calculate home equity amount