What is the best private pension?

A private pension is a type of defined contribution pension that can help you save for retirement. It’s based on an individual contract made between you and your pension provider, and offers a flexible way to save regardless of your employment status.

What is a private pension?

Private pensions are also known as personal pensions, and are separate to your State Pension and any workplace pension schemes you may be a member of. In contrast to a workplace pension that’s setup by your employer, a private pension plan is setup by you, and enables you to choose your own pension provider.

Most private pensions are defined contribution pensions, which means their value at retirement is based on the amount of money you’ve paid in and how your investments perform. Your pension savings will be invested in a combination of assets such as shares, bonds, property and cash.

How do private pensions work?

There are two main types of private pension UK citizens can choose from. The majority of private pension plans will involve your pension provider selecting the funds you invest in, however another option is a self-invested personal pension (SIPP), which lets you control how your pension is invested.

Setting up a private pension is relatively straightforward and it’s possible to have more than one. They’re particularly useful if you’re unemployed or in need of a self employed pension, as the amount you pay in and the frequency of your contributions is flexible. If you’re working, your employer can opt to contribute to your private pension scheme and others, such as a spouse or partner, can also contribute.

Usually any private pension contributions you make are eligible for tax relief, which your pension provider will claim from HMRC on your behalf. For every £100 paid into a pension by a basic rate taxpayer, the government pays in £25, making the total contribution £125. Higher and additional rate taxpayers can claim a further 25% and 31% respectively through their Self-Assessment tax returns. In 2024/25 you can claim tax relief up to 100% of your salary or £60,000, depending on which is lower.

When can you withdraw money from a private pension?

You can cash in a private pension from the age of 55, however the private pension age is due to increase to 57 by 2028. You can take up to 25% tax-free as a private pension lump sum, after which point the remaining 75% will be taxed at your marginal rate of income tax.

There are a couple of options for cashing in a private pension. You can keep some of your savings invested with drawdown and only withdraw money when you need it. Alternatively, you can purchase an annuity which will pay you a regular amount for a fixed period of time.

It’s possible for private pension payments after death to go to your spouse or beneficiaries, however they may have to pay tax depending on how old you are when you die.

Starting a private pension

The best private pension for your needs will depend on your attitude to risk and your expectations for how your pension should be invested. There are hundreds of options available so before you start a private pension, you may wish to undertake a comparison.

PensionBee offers private pensions that allow you to combine all of your old pensions into one and easily manage your pension online. Find out more about how it works, and read our most recent reviews.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 06-04-2024

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