Introduction to Private Pensions
What You Need to Know
- Since a state pension may not be enough to enjoy a comfortable retirement, many workers to contribute to private pensions, too.
- As well as company-run private pension schemes – into which both employers and employees make payments – personal pensions are also available.
- As of 2011, private pension schemes are available to all UK residents under the age of 75.
- Be aware that, since many pension funds invest in stocks and shares, their value can fluctuate.
- You are only allowed to pay up to £225,000 into a personal pension pot per year and just £1.8 million over the lifetime of the fund.
- Since April 2010, there is a minimum age of 55 for claiming your pension, though you may be able to claim earlier than this if you can prove you are in poor health.
- Remember, any money you put into a pension plan is not taxed, giving you an extra incentive to save for your retirement.
What is a Private Pension?
A state pension is the basic pension provided to all UK citizens after they reach the statutory retirement age in the UK.
Since for many people this will not be enough to enjoy a comfortable lifestyle in their later years, most opt to contribute to private pensions, too.
Alongside company-run private pension schemes – into which both employers and employees make payments – personal pensions are also available. These are geared towards allowing people who are out of work, self-employed or whose employers don’t offer a pension scheme, to save for their retirement. Prudential, Aviva and Scottish Widows are among the biggest private pension scheme providers in the UK, though many more are also available.
As of 2011, private pension schemes are available to all UK residents under the age of 75.
Potential Risks of a Private Pension
Given that many pension funds invest in stocks and shares, their value can fluctuate.
Indeed, while pension funds are designed as longer-term investments and as such shorter-term blips are usually cancelled out by overall gains, there is still an element of risk involved and you should be aware that there is a small possibility the value of your pension pot could go down.
This means it pays to do your homework before committing to a scheme. Look at the long-term performance results of the various funds available and also be sure to look at the protection your savings benefit from under Financial Services Authority (FSA) and the Pensions Regulator (TPR) regulations.
How to Choose a Private Pension
A range of private pension schemes are available in the UK. For example, they can be purchased from some insurance companies, many high street banks, investment firms and even some supermarkets.
However, special care should be taken when choosing the right private pension scheme for you, not least as different schemes will require varying levels of financial commitment and, just as importantly, the amount they will pay out on your retirement will vary greatly. As such, it’s a good idea not to simply go with the most convenient scheme – for example by signing up to the scheme offered by your existing bank – but rather to do your homework and even invest in some professional advice.
Workplace Pension Schemes
Many employers provide their staff with access to a pension scheme, though you are not required to sign up to it. Again, there are numerous different types of scheme operated by UK employers. The most common types of workplace pension scheme are:
- Defined Benefit Schemes: These can include final salary of career average related schemes, whereby the amount paid out at retirement is based on your length of service and earnings.
- Defined Contribution Schemes: These schemes provide retirement benefits based on the contents of the ‘pot’ built up over the years by contributions from both the employee and the employer.
Personal Pension Schemes
Personal pension schemes were created to help and encourage self-employed individuals and those whose employers don’t offer a pension scheme save for their retirement. Generally speaking, savers are able to choose between standard, stakeholder and self-invested personal pensions (Sipps), with your personal circumstances, as well as your attitude to things like risk and taking an active role in managing your money, determining which is the best option for you. Consider seeking out professional advice if you are unsure which type of personal pension scheme is right for you.
Note that you are only allowed to pay up to £225,000 into a personal pension pot per year and just £1.8 million over the lifetime of the fund. Meanwhile, if you are not actually earning, while you can still pay money into a fund, your contributions are capped at just £3,600 per year.
Any money you put into a pension plan is not taxed, giving you an extra incentive to save for your retirement.
Additionally, if you have already been taxed on money they money you’re putting into a private pension; HMRC will pay that back directly into your pension plan.
Claiming a Private Pension
Again, the final value of your pension fund will vary according to how much has been paid in and how well the investments of the fund have performed while you have been saving.
You should ensure you receive regular forecasts when you are saving towards your pension.
Similarly, the age at which you are able to start claiming a private pension also vary according to provider, though since April 2010, there is a minimum age of 55 (though you may be able to claim earlier than this if you can prove you are in poor health).
Note that you may not even have to finish work before you can start drawing on your pension; some schemes will let you draw some or even all of your pension before you retire. This can allow you to phase your retirement, for example by enabling you to switch to part-time hours at the end of your working life.
What Happens to a Fund if You Die?
One common concern among people looking into starting a private pension is what will happen to their fund in the case of their death.
Quite simply, you will be asked to name a beneficiary, namely somebody who will inherit the money you have put aside if you die before you start claiming your pension. This can be passed on either as a single lump sum, or you may opt to provide your beneficiary with a regular income.
Should you die after you have started claiming your pension, then what happens to the money from your fund depends on the terms and conditions laid out in your private pension plan, so you should take this into consideration when choosing a scheme.
- For more information on saving for your retirement, visit the website of the Pensions Advisory Service.
- Find out more about your options for funding later life with our guide to self invested personal pensions.
- Read the government’s guide to retirement planning.
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