What is a private pension?

How private pensions work, paying into one, taking benefits, tax on private pensions and more.

A private pension is a great way to make sure you can fund the lifestyle you deserve after work. In this article, we'll look at what a private pension is, how they work and who should set one up.

How private pensions work

A private pension is a type of defined contribution pension that you can set up to save for life after work. With a private pension, you add money to your pot yourself, rather than relying solely on contributions from an employer or the government. Hopefully, over time your pot will grow to give you an income in retirement.

With a private pension, you add money to your pot yourself

Your private pension plan doesn’t have to be connected to your employer, although they can still pay in if required. As with the other types of pension, any investment you make into this type of plan can't be withdrawn until you reach the required private pension age - usually 55, rising to 57 in 2028.

Paying into a private pension

When setting up a private pension, the first thing you need to decide is how much you'd like to save. You can make regular contributions every month, one-off payments, or a combination of the two. The best part? Every time you pay in, you'll benefit from tax relief on your contributions.

For every £100 you pay into your private pension scheme, the government adds £25 as a tax bonus. Remember, private pension rules mean that you can only get this tax relief on contributions up to £60,000, or your total earnings for that tax year, whichever is lower.

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

Taking your private pension benefits

You can withdraw your private pension plan at 55 (rising to 57 in 2028) in a number of ways. The first 25% is tax-free. You can withdraw it as a cash lump sum, take it in smaller chunks or withdraw a regular amount as an income. You could also use it to buy an annuity to provide a guaranteed income for life. Or you can do a combination of these options.

With a private pension, you receive certain tax benefits within the rules the government set out. To encourage people to save for the future, they offer:

  • tax relief on everything you pay in
  • tax efficiency on your savings (as money in your pension pot grows free from UK income tax and capital gains tax)
  • the option to take out 25% of your pension pot as a tax-free cash lump sum.

The law and tax rates may change in the future, and the value of tax relief will depend on your individual circumstances.

Why do I need a private pension?

Both private pensions and workplace pensions are a great way of saving for life after work.

Some people may want a private pension in addition to their workplace pension to help make additional savings. Particularly if the pension funds offered by your place of work aren't a good fit. Or if the fund management charges are high.

It’s important, however, to monitor the contributions being made into your workplace and private pension to make sure they stay within your annual allowance - the maximum you can add to your pot each year is £60,000 (from the 2023/24 tax year onwards) or your total income, whichever is lower.

You may also want to look at setting up a private pension if you’re self-employed and want to take control of your savings, or if you fall below the requirements for a workplace pension.

In both cases, a private pension plan is a great way to make sure you're fully prepared for life after work.

Can I get the State pension and a private pension?

There are no rules against using a private pension as well as the State pension. In fact, the government recommends that you plan for your retirement and make sure you have adequate savings for later in life. Supplementing your State pension with a private pension plan is a great way to ensure you have a comfortable retirement.

It’s also worth keeping in mind that the state pension age is increasing from 66 to 68, and it's unknown how much further this will increase in the future. If you're starting to think retiring, or even working less, it's important to think about how big your pension pot will need to be to fund your desired standard of living.

Tax on private pensions

Everything you pay into your private pension is free from tax. The only exception comes if your payments go above these limits:

  • 100% of your yearly income
  • £60,000 a year

You'll receive the tax you're owed back whenever you pay into your pension. Every contribution will receive a 25% bonus as tax relief, added to your pot automatically. Higher and additional rate taxpayers can claim even more back as tax relief via a self-assessment tax return. For information on the tax advantages of private pensions, check out our article on pension tax relief.

Can I take my private pension and still work?

You certainly can. There is no law that prohibits you from working after accessing your pension, as long as you've reached the required private pension age (usually 55, rising to 57 in 2028).

Remember, 75% of your income from your pension is taxable as income. If you add this to income from your work, you may increase the amount you owe as income tax.

It's also worth noting that once you've started withdrawing from your private pension, you can't continue contributing to the same scheme. You can pay into another private pension plan using income from work.

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