What’s a Private Pension Scheme?

Private Pension Scheme: Who is Eligible and What it Does

Picture this. You have an epic retirement party & are excited about the next chapter in your life. Three weeks in, you head to the bank & withdraw your final income since you’ve been thinking about starting that kitchen renovations project you’ve always been wanting to work on. After buying some DIY home project essentials, you run out of cash & now need to look for another source of income to support your project. Lucky for you, you spent half of your life paying into a private pension scheme. So, you head to your pension provider & receive a handsome initial amount tax-free & can now start working on your project. Within a few weeks, you have the kitchen of your dreams & can’t wait to hold the next family barbeque party at your house. Now imagine if there was no private pension fund somewhere waiting for you to draw from. It’d a dire situation, right? Well, saving for retirement is the smartest financial decision you’ll ever make in your life, & you don’t have to wait until you’re 45 to start. You can start saving from as early as 20 – starting earlier on actually ensures that you’ll have a significant pension pot by retirement. If you have no idea which pension scheme to invest in, here’s a detailed guide on private pensions to help you figure out if it’s your ideal option.
What’s A Private Pension Scheme

Private Pension Schemes Defined

A private pension scheme is also referred to as a personal pension plan. It’s typically a pension fund that you set up for yourself.

A private pension is usually a defined contribution pension scheme. It allows you to save cash for your future, and the pension plan’s value is generally based on the amount of capital you’ve contributed and your investments’ performance.

How Private Pension Plans Work

How Private Pension Plans Work

Let’s get this show on the road:

A private pension scheme1 works similarly to the workplace pension plan, but you usually set it up instead of your boss. You can make contributions regularly, mostly monthly, or make one-off payments into your pension savings pot and your pension provider will claim some tax relief from the state on your behalf.

This is how it works,

The cash you place into your personal pension plan is usually invested in a variety of asset choices like stocks, shares, real estate, bonds, and even money. When you set up the pension fund, you’ll be offered a variety of pension funds to chose from, depending on the number of risks you’re willing to take.

When you hit 55 years of age, you can draw from your private pension as either a lump sum amount, or opt to purchase an annuity 2(guarantee income). You can also opt to leave it in the pension pot or withdraw in a series of drawdowns.

Tax Relief on the Private Pension Scheme

Tax Relief on the Private Pension Scheme

You receive tax relief when you start contributing to the private pension plan. Your pension provider will claim the tax relief on your behalf at the introductory rate and then include it in your pension pot. You receive tax top-ups of about 25% on contributions that you make, meaning that if you contribute £200 into your pension, the HMRC will add another £25 thus bringing the total amount to £225.

Those in the higher and additional rate taxpayer band can claim a further 25% and 31% respectively through the Self-Assessment tax returns.

Fun fact:

According to the 2020/21 financial year tax rates, one can receive tax relief on their pension contributions up to 100% of their income or £40,000, depending on the lower amount.

Who Requires A Private Pension Plan

Who Requires A Private Pension Plan?

The personal, private, and workplace pension schemes are an ideal way of saving for the sunset years. They can be essential if you want to bolster any income that you might get from the state pension, which is currently set at £9,120 per year.

You can set up a private pension even if you have a workplace pension. However, your boss is required by law to pay into your pension plan under the Auto Enrolment, which makes the workplace pension incredibly worthwhile.

You see:

If you don’t own a workplace pension scheme, perhaps since you opted out or you’re self-employed, then setting up the private pension is one of the ideal ways of kick-starting your retirement saving journey. However, it’s essential not to favor one type of pension plan over the other.

All you have to do is try to save in both the workplace pension and private pension schemes.

Got Questions? Check These First

What’s Classed As A Private Pension?

What Are the Benefits of A Private Pension?

What’s the Difference Between A Private Pension and State Pension?

How Much Can You Pay into A Private Pension?

In conclusion

All in all:

The private pension scheme is a great way to ensure that you have enough money for your retirement. It can be difficult for many people to save up the funds they need, but this saves them from doing it themselves and ensures that their money will be invested wisely by professionals who know what they are doing.


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