Lewis Surtees Assistant Tax Consultant

A private pension defines both the workplace pension which is arranged by your employer and personal pensions which are set up yourself.

They provide a way for you to save for retirement, providing you with an additional income to supplement the amount you will receive from the state pension. Money saved into your pension qualifies for tax relief so any contribution you make to your pension means less of your income is lost through tax.

Currently, the state pension provides a maximum of £8546 a year, which for most people isn’t enough to live on. Therefore, by also having a private pension, employees have more saved for when they retire at 55 or thereafter. 

What different types of private pensions are available?

Workplace PensionA workplace pension is a private pension scheme that is arranged by your employer. These schemes are often known as occupational or company pensions. Workplace pensions operate through automatic enrolment, where both you and your employer contribute a percentage of your earnings to the pension scheme. The contributions are invested, and the accumulated fund provides you with an income during retirement.

Personal PensionPersonal pensions are private pensions that you set up yourself, independent of your employment. They are ideal for self-employed individuals or those who do not have access to a workplace pension. With a personal pension, you make regular contributions and choose how the contributions are invested. These pensions offer flexibility in terms of contribution amounts and investment options.

Self-Invested Personal Pension (SIPP)A Self-Invested Personal Pension (SIPP) is a type of personal pension that provides you with more control over your investments. With a SIPP, you have a broader choice of investments, including stocks, bonds, and commercial property. This option is suitable for individuals who have knowledge and experience in managing their investments.

Stakeholder PensionStakeholder pensions are a type of personal pension that are designed to be simple and low-cost. They have a cap on charges and flexible contribution amounts. Stakeholder pensions are beneficial for individuals who want a straightforward pension plan with minimal involvement in investment decisions.

Final Salary Pension (Defined Benefit Pension)Final salary pensions, also known as defined benefit pensions, are workplace pensions that provide a guaranteed income based on your salary and the number of years you have been a member of the scheme. These pensions offer a secure retirement income, as the amount you receive is not dependent on investment performance. However, they are less common now and mostly available to long-standing employees of certain organisations.

AnnuitiesAnnuities are a retirement income option rather than a pension plan itself. They involve using your pension fund to purchase a financial product that provides a regular income for the rest of your life. Annuities offer the advantage of providing a guaranteed income, but they lack flexibility and may not keep up with inflation.

What are the most tax-efficient private pensions?

You can get tax relief on private pension contributions worth up to 100% of your annual earnings. You will either get the tax relief automatically, or you will have to claim it yourself. It depends on the type of scheme you’re in, and the rate of income tax that you pay. 

The most tax-efficient private pensions include workplace pensions, where contributions receive immediate tax relief, and personal pensions, where tax relief is based on your income tax rate. Self-Invested Personal Pensions (SIPPs) offer additional tax advantages, with tax relief on contributions and tax-free growth within the pension. In the recent Spring Budget, there were various changes to the pension limits. To determine the most tax-efficient option for you, it's recommended to seek guidance from a financial advisor or tax specialist based on your circumstances.

When can I access it?

The age at which you can access your private pension depends on the rules of the specific pension scheme. Generally, you can access your private pension when you reach state pension age less 10 years (currently 55), but it's important to note that the government has announced plans to increase the minimum age to 57 from 2028. There are also options for accessing your pension earlier in certain circumstances, such as ill health.

Private pensions are an essential tool for building a secure financial future during retirement. Whether through workplace pensions, personal pensions, or more specialised options like SIPPs or annuities, individuals have various choices to save for retirement. Understanding the different types of private pensions and seeking professional advice will help you make informed decisions about planning for a financially comfortable retirement.

Talk to an expert?
Tax affairs are complicated, and we would always advise that you seek advice from a financial advisor when considering different types of private pensions. For more information on how we can help you and your business please contact us at marketing@oldfieldadvisory.com or call 02476673160

Please note: This article is provided for information only and was correct as at time of writing (13/07/23). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance.  No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.