Do I need a private pension?

  •  By
  •  Murray Humphrey

For many of us, the world of pensions is about as clear as the Thames. Full of confusing terms, unclear benefits and endless options. Particularly when you don't have an employer to take care of everything for you.

As someone who's self-employed, it's completely normal to ask: do I need a private pension? This article will help you find out, once and for all, if you should start a private pension.

What Is A Private Pension?

Let's start with the basics. A private pension is a way to save for life after work. You contribute into your pension from your earnings, which are then put into an investment fund to help them grow.

The goals is that, over time, the value of your investments will increase, giving you a much larger pot than you would've had otherwise. By the time the you reach retirement, you will hopefully have a large sum of money to fall back on and support you and you loved ones financially, helping you enjoy your later years.

Of course, as with all investments, there is a risk that the value of your pension could go down, as well as up. The government recommends that you plan for your retirement and make sure that you have adequate savings for later in life.

Individuals invest in funds by setting up regular contributions (e.g. monthly) or make one-off payments into saving schemes run by insurance companies. Any contributions made into private pension schemes are tax-deductible.

Private Pension Plans Vs Personal Pension Plans

A private pension can also be referred to as a personal pension . To-may-to, to-mah-to, it's just semantics. Personal pensions are pensions that you arrange yourself, exactly the same as a private pension.

Is a Private Pension Right for Me?

Private pensions are ideal for self-employed people or individuals taking time off work to care for children or elderly relatives. It would be prudent for anybody without a company pension to invest in a private pension or a SIPP (Self-employed personal plan).

Penfold works with lots of different self-employed individuals who enjoy being their own boss. From freelancers, to sole traders, and ltd company directors – we help lots of entrepreneurs set up a pension plan that will serve them for the rest of their career.

More and more of us are starting to work for ourselves, and with the pension age increasing, the need for robust self-employed pensions are more critical than ever before. Penfold endeavours to guide and educate the self-employed through their pension journey to ensure the new generations don’t neglect their long term savings plans.


How Does a Private Pension Work?

Private pensions work similarly to workplace pensions but are set up by you rather than your employer. You can set up regular contributions (e.g. monthly), or if it would suit you better to make one-off payments into your fund you have the flexibility of doing that too. Your pension provider will add tax relief. For every £100 you pay in, the government adds £25.

If you’re a higher or additional rate taxpayer, you can claim further tax relief in your self-assessment tax return.

What is a SIPP?

A SIPP is a Self Invested Personal Pension. The main difference between a personal pension and a SIPP is the investment choices available to you. Think of a SIPP as a DIY pension. It gives you the freedom to choose and manage your own investments.

Who is a SIPP and Private Pension For?

The short answer is anybody. You can open one or more SIPP or personal pension accounts alongside other investment products you may have, such as workplace pensions, ISAs, property and more. Some people may want a private pension or SIPP in addition to their workplace pension so that they can make additional savings to cast their safety net further afield for the future.

Key Differences Between a SIPP and Personal Pensions

There is little difference between the two. By choosing to invest in a SIPP, you manage your investment funds yourself, meaning that you are taking on the risk of managing your own funds. With a personal pension, you will have to choose from a finite amount of investment schemes available to you, provided by your pension provider. These investments are more likely to be low risk and less hassle.


Which Is Better for Me? A SIPP or Personal Pension?

Whether you take up a SIPP or a personal pension depends on two principal considerations:

  • Your investment strategy
  • Charges and fees

Your Investment Strategy

Consider whether you want to take on responsibility for managing your own investments? Are you comfortable with making high-risk investment choices?

A SIPP will typically have a wider choice of shares, investment trusts, or investment funds that are not widely available through a personal pension. The opportunity to participate in higher-risk investments and make a more significant return also brings a greater risk.

Pension Charges and Fees

Personal pensions typically charge a percentage fee for the product, whereas SIPPs mostly have fixed fees. A SIPP can also have higher charges than personal pensions.

Penfold’s private pension annual fees vary between 0.75% or 0.88% (depending on your investment type) of the total amount you have saved up in your Penfold pension. There will never be any hidden costs or fees sprung on you. You can find out more about the cost of a Penfold pension here.

Financial Protection for Personal Pensions and SIPPs

Personal pensions like Penfold’s Self-Employed pension scheme are covered up to 100% under the FSCS scheme (Financial Services Compensation). Whereas with a SIPP you are covered up to £50,000 per fund. Investors will normally hold very little cash with SIPP providers directly, as it’s usually invested within investment funds or trusts that will have their own FSCS limit.

What Type of Pension Plan Does Penfold Offer for the Self-Employed?

Penfold works with a personal pension invested in a special plan provided by BlackRock contracts designed to give you the best pension available.

Can I Have a Personal Pension and a State Pension?

The short answer is yes: you can open more than one SIPP. It's a financially savvy investment, which is why many investors choose to hold multiple pension accounts. If you do opt to have multiple pension accounts, ensure that you stay within your annual allowance.

The new State Pension typically provides you with earnings close to £179.60 per week. However, the State pension is not a set figure, and what you're eligible to receive will change depending on some variables, including the hours you have worked throughout your life. Whatever you are entitled to receive for a state pension will not be impacted by you receiving money on your SIPP or personal pension.


Financial Planning: Little Acorns Grow Into Mighty Oaks

It’s essential to think about when you want to work less or retire and how much you might need to fund the standard of living you wish to achieve. As an individual pension saver, one of the best ways to make your money work for you long-term is by leveraging compound interest, as your pension builds and yields growth over time. Compounding can help you earn a higher return on your savings.

Accessing Your Personal Pension

You cannot access money in a pension until the age 55 (57 from 2028) when up to 25% is usually tax-free and the rest taxable. Penfold’s app allows you to top up, change, or pause your pension contributions at any time — instantly and online.

Security is King

Penfold does not manage money directly. When you add money into your Penfold pension, it is invested in a special plan provided by BlackRock, the world’s largest investment manager, who would continue to invest your pension if we disappeared.

Additionally, your pension is protected by the FSCS Scheme should the investment manager fail, where the Government protects up to £85,000 of your money (just like every other bank).

Penfold is regulated by the Financial Conduct Authority (FCA), which means that everything we do is subject to a wide range of controls and procedures that the UK's financial regulator approves to keep your pension safe and secure.

Consolidating Your Pension: Get A Handle on The Numbers

Having multiple pensions open with different account providers can feel like you are juggling sand. Lots of little pension pots spread out can leave you struggling to understand the actual value of your pension. Penfold likes to keep things nice and tidy, which is why we consolidate all of your pensions into one place. Moreover, transferring all of your pensions over is entirely free! You can check your pension status any time of the day - simply log into the app and watch the numbers climb.

A photo of Murray Humphrey

Murray Humphrey