What are private pensions and how do they work?

Private pensions are a type of personal pension that you can set up yourself. They are a great option if you are self-employed or just looking to put away a bit of extra cash for retirement alongside your workplace pension.

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

Both private pensions and workplace pensions are types of personal pensions. Most workplace pensions and all private pensions are what’s called a defined contribution scheme, so they work in very similar ways. One of the main differences is that a workplace pension is set up for you by your employer, whereas a private pension you set up yourself.

With a workplace pension, your employer also contributes to your pension to help your pot grow. And, generally, there is a minimum amount that you must contribute to your workplace pension. Whereas with a private pension, you can decide how much and when you make contributions.

What do you mean by defined contribution?

Defined contribution is the most common type of pension. With a defined contribution pension:

  • You receive tax relief on the contributions you make, meaning you get back the income tax you would have paid on that money

  • Your savings are invested in the stock market to help your pot grow

  • The value of your pot at retirement all depends on the money you have contributed, how well your investments have performed and the charges you have paid

Can I transfer my other pensions into my private pension?

A lot of people choose to consolidate their pensions to make them easier to keep track of and manage. And you can certainly do so by transferring your other pensions into your private pension. Before you do so, there are a few things to consider:

  • Is my private pension the best scheme I have? Does it have lower charges than the rest?

  • Is my employer still contributing to my workplace pension?

  • Do I have a final salary scheme?

When consolidating your pension, it is best to transfer into a scheme that has lower charges and a history of higher performance. This way you know your money is in the best place to have more potential to grow before you retire. If your employer is still contributing to your workplace pension then it’s best to leave this one alone all the while you still work for the company. This is because your employer is unlikely to switch their contributions to a different scheme.

If you have a final salary pension, it’s best to leave this one alone too. This type of scheme comes with valuable benefits and guarantees, and transferring out of this scheme would mean giving up these benefits.

Can I access my private pension at 55?

Yes, you can. Under current government rules, you can start to access your private and workplace pensions from the age of 55. And you have great flexibility as to how you access them and how much you take. Before you access your pension it’s a good idea to speak with a financial adviser because taking too much from your pension too soon could leave you will less to live on later in life and could leave you with a large tax bill now. A financial adviser will help you to know what pension options are best for you while making sure your future remains financially secure.

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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.