A private or personal pension is a type of defined contribution pension. It doesn’t have to be connected to your workplace or an employer, although your employer can still pay in, if required. As with the other types of pension, any investment you make into this type of plan will be tied up until you take your benefits.
Like a workplace pension, you can make regular or one off payments into your plan, and they’re eligible for tax relief so for every £100 you pay in, the government adds £25 (up to the annual allowance of £40,000 or your earnings for that tax year, whichever is lower).
If you’re a higher or additional rate tax payer then you can claim further tax relief in your self assessment tax return.
You can withdraw your pension at 55 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!
Some people may want a private pension in addition to their workplace pension so that they can make additional savings. Particularly if the fund range for your workplace pension isn’t as extensive as you’d like, or the charges are higher than the ones with your chosen private pension provider. It’s important, however, to monitor the contributions being made into the workplace and private pension to make sure they stay within your annual allowance.
You may also want to look at setting up a personal pension if you fall below the limits for your workplace pension or if you’re self-employed and want to take control of your savings then likewise, a private pension could help you save for later life.
In fact, the government recommends that you plan for your retirement and make sure you have adequate savings for later in life. It’s also worth keeping in mind that the state pension age is increasing from 66 to 68and it's unknown how much further this will increase in the future. It’s important 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.