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
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
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.
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?
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.
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?
A private pension is classified as a personal pension scheme, and it’s a financial product that one can use to save cash for their retirement. The pension fund is usually a defined contributions pension scheme meaning that the capital you get upon retirement is based on the amount of money you’ve contributed into your put and how your investments perform.
What Are the Benefits of A Private Pension?
Well, some of the perks of saving into a private pension is that:
- You receive tax benefits – you receive a 25% tax top-up from the state5
- It’s not limited to a specific group of people, and anyone can pay into it
- Private pension schemes are flexible
- You’re guaranteed an income upon retirement
- You can also earn some compound interest if you make smart investments
What’s the Difference Between A Private Pension and State Pension?
The state pension plan is typically a promise by the government to offer you a specific amount of cash every week when you hit the state pension age. A private pension, on the other hand, is a personal pension scheme that one contributes to themselves.
The size of the private pension pot is based on the number of contributions you make and how your assets perform.
How Much Can You Pay into A Private Pension?
Well, based on the 2020/21 financial year, you can pay up to 100% of your salary into your pension fund every year. Or up to the yearly allowance of €40,000. That means that the total amount of private pension contributions, employer contributions and tax relief from the government can’t surpass the €40,000 yearly pension allowance.
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.