What is A Private Pension?

Clare Parkinson

blog-publish-date

21 Jun 2018

blog-read-duration

A private pension plan, or personal pension plan, is a money-saving scheme that you can use to make sure that, once you retire, you have funds for all the things that you want to do now after all those years of hard work. Private pensions are often 'defined contribution' pensions. A private pension fund can go up and down in value, based on how well your investments perform.

Do I Need to Set Up A Private Pension Scheme for My Employees?

No. As a business owner, you don't need to do anything about your employees' private pensions. A person sets up their personal pension on their own. Of course, you do need to set up a workplace pension scheme for your staff.

How Does it Work?

A personal pension scheme works by you making either (or both) one-off payments or monthly contributions into the pension. When you begin setting up your personal pension, you will have a range of pension funds from which to choose. These will vary depending on how much risk you're willing to take in your investments. You can invest your money into assets including:

  • Cash
  • Property
  • Bonds
  • Shares

This list isn't exhaustive.

When Can I Take My Pension Out?

The ripe age of 55 is currently when you can start taking out your pension. When you reach 55, you have a few options with your private pension:

  • Use it to buy an annuity. This is a guaranteed income for a fixed term. There are different kinds of annuities. Make sure you read about the different options available.
  • Take out your private pension as a lump sum.
  • Leave your pension in the plan to continue investing—the value could still go up or down. You can still withdraw cash amounts when you need them.

Is There Tax on A Private Pension?

You'll be glad to know that you get tax relief on a private pension when you make your payments. Your provider claims the tax back and adds it into your pot. With the standard rate of tax relief at 20%, essentially it looks like this: Let's say you pay £4,000 into your pension during a year. HMRC will add £1,000, which is of course 20% of £5,000. However, rates may vary for people who pay a higher tax rate. Furthermore, if you're an "additional rate" taxpayer, you can claim 25% extra pension tax relief.

Can I Set Up A Private Pension Even Though I Already Have A Workplace Pension?

Of course you can. Moreover, in fact, in an ideal world, everyone would do so. By having a private pension in addition to your workplace pension and your State Pension, you'll have more saved earnings to draw from when you get to 55, or whenever you decide to retire after that. The State Pension currently provides a maximum of £8,546 per year. This is a good start, but it might not be enough to live on. Therefore, it's seriously worth thinking about what the future version of yourself will use to pay for weekly amenities, like lunch with the grandkids or a round of drinks after golf with friends. With a private pension, you're doing yourself a big favour.

Talk to an Expert

There are lots of pension providers. Choosing the best private pension scheme isn't something you should do hastily. Do your research. If you have any questions about pensions, contact Croner's reward, HR, employment law, and health & safety experts on 0808 145 3375.

About the Author

Clare Parkinson has over 20 years’ experience in the Croner Reward business. As Business Manager, Clare leads a team of Reward Consultants who specialise in the delivery of pay and grading related advice, including tailored pay benchmarking and gender pay reports.

Over the years, Clare has contributed to various industry publications on topics such as gender pay, executive remuneration and market pay trends.

Free to Download Employer Resources

  • Model Apprenticeship Agreement

    FREE DOWNLOAD

    Model Apprenticeship Agreement

    Read more
  • Sample COSHH Assessment Record

    FREE DOWNLOAD

    Sample COSHH Assessment Record

    Read more
  • Return to Work Interview Form

    FREE DOWNLOAD

    Return to Work Interview Form

    Read more
  • Fire Safety in the Workplace

    BLOG

    Fire Safety in the Workplace

      If you’re reading this, and you’re an employer, you—yes you—are responsible f...

    Read more
  • Employers' Guide to Employee Development Plans

    BLOG

    Employers' Guide to Employee Developm...

    Employees have plans for their personal and professional lives. From getting mar...

    Read more
  • Case Law Update: Protection for Whistle Blowers

    BLOG

    Case Law Update: Protection for Whist...

    The Employment Appeal Tribunal (EAT) has held that, in order for whistle blowers...

    Read more
  • Syalons

    CASE STUDY

    Syalons

    International Syalons is a manufacturer of advanced ceramics, working for variou...

    Read more
  • Pangea Support

    CASE STUDY

    Pangea Support

    We see Croner being integral to our organisation moving forward, and we’d defini

    Read more
  • JC Couriers

    CASE STUDY

    JC Couriers

    With Croner it genuinely feels like they want me to be a success. And I'm happy

    Read more

Do you have any questions?

Get a free callback from one of our regional experts today