What's a Private Pension Scheme?

Private Pension Scheme: Who is Eligible & What it Does

No Idea Which Pension Scheme to Invest In? Fear Not! Here's a Detailed Guide to Private Pensions to Help You Figure Out if It's Your Ideal Option.

What's A Private Pension Scheme

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.

You may also like

Editorial Note: This content has been independently collected by the EveryInvestor advisor team and is offered on a non-advised basis. EveryInvestor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.
Taylor Holt - 300x300

Written by
Taylor Holt
Estate Planning Expert

Taylor Is Our Resident Estate Planning Expert. He Knows That Everything Revolving Around Wills or Funeral Planning Can Be a Sensitive Subject That People Don’t Like to Discuss. But He Also Knows How Important It Is to Know All There Is to Know About It. Taylor Makes It His Mission to Spread Awareness About Estate Planning, and We Believe Everyinvestor Is the Best Platform to Do That.

Monique - 300x300

Written by
Monique Pittman
Pensions Expert

Monique Is Our Resident Pensions Expert. Many People Postpone Planning Out Their Pension, Thinking That Is Something They’ll Have to Worry Much Later in Life. Monique Knows How Important It Is to Start Planning Your Pension Early, and She Wants You to Know It Too!

Private Pension Scheme

Written by
Lisa Schilling
Insurance Expert

Lisa Is Our Resident Insurance Expert. She Knows How Important It Is to Be Ready for Any Scenario, Especially When a Family Member Is Involved. Nobody Likes Being Found Unprepared in a Tough Situation! Lisa Can Find the Best Insurance to Cover Your Every Need, Present and Future.

Doyle Edwards - 300x300

Written by
Doyle Edwards
Mortgages Expert

Doyle Is Our Resident Mortgages Expert. He Comes From a Long Line of Financial Gurus, and It Truly Shows. Despite His Young Age, There Is No Question He Cannot Answer When It Comes to Mortgages, and His Ability to See Outside of the Box to Find the Best Mortgage Deals Is Truly Impressive.

jason stubbs 300x300 1.jpg

Written by
Jason Stubbs
Equity Release Expert

Jason Stubbs Is a Specialist in the Equity Release Sector. He Enjoys Helping Older People Who Are Struggling Financially Get Out From Under Financial Pressure.

rachel w.jpg

Rachel Wait
Personal Finance Journalist

Rachel is an experienced finance journalist and editor with a particular interest in personal finance and consumer affairs. She has vast experience writing about money issues, property, insurance, and consumer affairs, and you’ll find her articles regularly featured in top media and newspaper publications.
francis.jpg

Reviewed by
Francis Hui
Senior Risk Manager

Having held various high-level roles across the industry, Francis is truly an expert in aiding UK citizens in their financial decisions and risk analysis. His unique insight and statistical knowledge make him the perfect person to help you take your financial future to the next level.
Mark Patterson

Written by
Mark Patterson
Mortgage Expert

Mark Patterson is a well-known expert in mortgages. He has been working as an expert for over 15 years, and he specializes in the UK mortgage market.
kath icon.png

Katherine Read
Consumer Affairs Writer

She writes on the topics of equity release, home reversion, and mortgages.

Nicola Date

Nicola Date
Writer & Journalist

Nicola is a financial writer for EveryInvestor and is passionate about the opportunities that equity release can open up for homeowners. Her extensive business experience and deep understanding of the industry means that she’s always up-to-date with the latest developments.