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An introduction to Private Pensions



Posted on: 30th July 2019

Private pensions, also known as personal pensions, provide a way for you to save for retirement so that you will have an income to supplement what you will receive from the state pension. In many cases, these will be defined contribution plans. This means that whatever payments you make will be invested. Not only does your total retirement amount depend on what you pay in, but also how your investments have performed and the level of charges.

This week, we are going back to basics to explain to those who may feel unsure, just how private pensions work.

Tax relief

Whether you belong to a company scheme or a personal pension, you will be entitled to tax relief on your contributions. For basic ratepayers, you will receive 20 per cent tax relief. Higher brackets, however, will receive an even larger percentage of relief, with the ability to claim a total of 40 per cent, rising to 45 per cent for those who pay additional tax rate.

Choosing a personal pension over a workplace pension

Not everyone is part of a company pension scheme. Those who are self-employed or would like another pension to provide them with additional benefits in retirement may choose this option. Your employer may also contribute to a personal pension.

Personal pensions may also be an ideal option for someone who has a history of multiple company schemes and wishes to bring them into one easy-to-manage plan. There is no limit to the number of pensions you can belong to, but it’s important to know you are limited to how much you can pay into them.

What can I do with the money in my private pension at retirement?

Pension freedom rules introduced in 2015 mean that there are even more options for using your pension to provide yourself with an income at retirement. Once you reach the age of 55, you can take 25 per cent of your pension tax-free. From there, you can choose between using your remaining amount to buy an annuity or income for life, or leave the remaining money invested and withdraw whenever you need. Or, you can combine these options if you feel you will benefit from both.

If you want to take out your entire pension in one go, this is also an option. However, be aware that only the first 25 per cent will be tax-free. This means you could face a steep tax bill on the remaining 75 per cent.

Making the right choice

If you feel like these options are overwhelming and you don’t know what to pick, don’t panic. Speaking with an independent financial adviser can help narrow down your options and decide which route will be best for your financial future. At Haven IFA, we aim to prepare our clients for a comfortable and enjoyable retirement. If you would like to learn more about our services, get in touch.