There are various things you can do to ensure that your future is comfortable. Eating your vegetables, going to the gym and having the right friends are some of these things. Putting money aside in your pension fund should also be high up on that list, but most people don’t think about it until they get to their late 30’s.
The conversation around pension funds makes most people think of their ageing parents or grandparents. However, if you want to lavish in your sunset years, you need to set money aside as soon as you start working.
In some cases, your boss or firm might offer you a pension fund1, which is fantastic. But what if they don’t? Or what if you’re self-employed, what options do you have?
Well, that’s where the private pension comes in. So what’s this pension fund all about? Here’s a detailed guide to take you through the world of private pensions and how they can be the ideal investment you’ll make in your life.
What’s A Private Pension?
A private pension is a fund that you chose, set up and make deposits into. It’s also referred to as the Personal Pension since it involves an agreement between you and the pension provider. The government and your employer, if you have one, are left out of this agreement.
Essentially, with this pension scheme, you have a variety of options. You can opt for the Defined Benefits Contribution Pension2, where you make a payment of a certain amount every month. The amount of money you have been saving up will be what you get on retirement.
You also have the option of the Self-Invested Pension Plan (SIPP), which allows you to control how your pension is invested – you can choose to invest in stocks, shares, bond, and several forms of funds like policies and trusts. If you, however, don’t want to manage your investments, you also have the choice of appointing a money guy to help you make the right investment decisions for you.
In most cases, personal pension providers are insurance companies, through intermediaries like banks.
How Do Private Pensions Work?
Well, the best private pension plan allows you to grow your pension pot and to set it up should be relatively straightforward. What makes private pensions worthwhile is that they also allow you to make several investments – you can have more than one.
They’re particularly useful if you’re unemployed or if you need a self-employed pension since the amount you pay in and the frequency of contributions is flexible. If you’re employed, your boss can choose to contribute to your private pension fund and others like your civil partner or spouse can also add to your funds.
Typically, any private pension contributions you make are eligible for tax relief, which the private pension companies will claim from the HMRC3 on your behalf. For every £100 you pay into your pension plan, the government will offer £25, making the total contributions £125.
Higher and additional rate taxpayers can also choose to claim a further 25% and 31% respectively through their Self-Assessment tax returns4. As per the HMRC, you’re now allowed to claim tax relief of up to 100% of your income or £40,000, depending on which is lower.
Identifying the Best Private Pension For You
There are various private pensions available, but some of them might not be a good match for you. To determine which option is the best for you, you need to consider factors like:
Most private pension funds you come across will have different charging structures. You need to pay attention to how much money you’ll be deducted on a monthly or annual basis because it’ll affect the final amount you can access on retirement. The charges in question might be for services like investment fund management and account administration. The self-invested pension is sometimes considered to be the one with the most cost-effective fees.
While looking at the charges assigned to different funds, you also need to keep in mind that just because an option has fewer expenses doesn’t mean it’s the best in the market. Those extra charges might give you access to services, which will allow your savings to grow.
Your Age and Investment Experience
If you’re a young person opting for a private pension, you need an option that gives you a margin of flexibility. That way, even if you feel the need to change to a different system with the time you have the leeway to do so. For an older, more financially experienced person, the SIPP (self-invested personal pension) might be a good option. It’ll allow you to put your understanding of the money market into use investing your money in different avenues.
Are You A Risk Taker or A Conservative?
The regular private pension plans allow your money managers to invest your money for you. However, these investments are controlled and sometimes only limited to several assets, which can be the ideal option for a conservative person.
Other private pension schemes, however, like the SIPP option, allows you to choose your investment choices. It, therefore, gives you the leeway to make riskier investment options and also to create a customized portfolio.
Whether you’re employed or not having a private pension is a good idea. You’ll have a chance to set money aside, invest it and then access it on retirement. It’ll also ensure that your lifestyle won’t take a hit once you stop working. However, make sure that you also ensure that you get the best private pension advice from an independent financial advisor who’ll guide you rightly.
Yes, it is. A private pension allows you to save your money and still get tax relief on it. If you put in £100 and the government tax relief in 25%, the government will give you and additional £25.
Your money can also be invested in various stock, shares and bonds. It allows your saving to grow while under the pension fund.
There are various private pension plans in the market. However, different people have different needs, and therefore what might work for you, might not work for another. The most common private pension plans in the market are the regular personal pension and the self-invested pension.
Private pensions are retirement saving plans which you establish and contribute to yourself. Setting up the pension plan is easy once you determine which option best suits your needs, both current and future. You then make your payments at the agreed-upon times. Depending on your provider, you can combine more than one private pension fund or even shift from one option to another. You then get to cash in the money accrued on your retirement.
Well, the best private pension in UK for your needs mostly depends on your attitude to risk, your expectations on how your pension pot should be invested and the type of personal pension provider you choose. Some of the best providers include:
- Interactive Investor Pension
- PensionBee Pension
- AJ Bell Pension
- Hargreaves Lansdown Pension
- True Potential Pension