Private pensions explained
Learn more about private pensions, how they work and the tax relief available
What is a private pension?
A private pension is a pension which you take out yourself rather than through your employer.
Also known as personal pensions, they are usually defined contribution pensions. The value of a private pension is built up by your personal contributions. These contributions are topped up by tax relief and then invested. This provides you with a pot of money which you can choose how to take in retirement.
You can contribute to your private pension regularly or through lump sums.
You can open a private pension if you already have a workplace. Alternatively, you can set up a private pension instead of a workplace pension.
What tax relief can I expect with a private pension?
Tax relief on private pensions is the same as on any other kind of pension.
When you contribute to your private pension, your money receives 20% tax relief which is claimed by the provider on your behalf. For example, every £80 you pay in is topped up to £100.
Higher and additional-rate taxpayers can claim back a further 20% and 25% respectively. You can claim additional tax relief via your self-assessment tax return.
Who can set up a private pension?
Anyone can set up a private pension. You can even set up a private pension alongside other pensions – such as your workplace pension.
Setting up a private pension may be beneficial if you are self-employed and do not have a workplace pension.
If you are setting up a private pension, you could set up a basic personal or stakeholder pension. These pensions tend to be easy to set up and offer a limited range of default investment funds.
Another option is a self-invested personal pension (SIPP). SIPPs allow you to choose your own investments. You can choose from a range of ready-made funds based on your attitude to risk, or choose investments based on your own research.
SIPPs are more suitable for people who are prepared to actively manage their pension.