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 551, you have a number of different options for accessing your funds in a way that best suits your needs.
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.
1Releasing money from your pension early isn’t right for everyone as it could leave you with less to live on later in life.