Yes, you can have a personal pension and workplace pension.
Workplace pensions are now ‘opt-out,’ which means that if you are an employee, it is likely that you will be automatically enrolled into a workplace pension when you start a new job.
Not having a choice in provider may have you looking to utilise your employment pension to supplement your state pension, and then use a personal pension to save for your future with more flexibility. Knowing how each pension works might make it much easier to figure out how to combine them or choose which one is best for you if you just want one.
What is a personal pension?
A personal pension is a fund built up from contributions made from your income (or other assets) and/or payments from your employer. These contributions are invested to achieve potentially more growth than you would otherwise receive if you saved in a bank or building society account.
A personal pension benefits from growth not only on your own contributions but also that of the government contributions (tax relief) and any company contributions, which over the long term, benefit from compound returns, for example: growth on growth each year.
For every £100,000 of pension accumulated over the years, you could, in general terms, receive about £5,000 per year of additional income to the State Pension.
The income you receive from Personal Pensions will depend on how much has been invested into it, how long the contributions have been invested for and how well or badly the investments have performed over and above any charges applied.
What is a workplace pension?
A workplace pension, or defined benefit scheme, is a promise from your employer of a future income which will increase with inflation. The amount of money you receive is determined by the number of years you have worked for the company, the amount of your earnings (either average or final earnings), and a factor specific to your scheme.
Common factors for these schemes are usually:
- an 80th scheme promises half of your final salary at a normal retirement age of 60
- a 60th scheme promises two thirds of your final salary at a normal retirement age of 65
- a 57th scheme offers you 70% of your career average salary at a normal retirement age of your state pension age (currently either age 67 or 68).
If you want to retire earlier than the normal retirement age, there is usually a penalty of about 5% for each year prior to the normal pension age.
There is no investment risk with this type of scheme as the factors used to calculate your future income are ‘defined’ and guaranteed at the outset. Therefore, it is necessary only to understand your annual statements, which explain the specific rules of your scheme to understand what your income will be from the scheme at retirement.
What is the difference between a private pension and a workplace pension?
The most significant difference is who sets them up. A workplace pension is set up by your company without your participation, whereas a personal pension (sometimes known as a ‘private pension’) is set up by you without your employer’s involvement.
Both pensions allow you to save for retirement and provide you some control over the amount you put in. A minimum contribution amount of 5% of your salary is collected from your paycheck before tax each month if you have a workplace pension. Your company will also contribute to a workplace pension, with a minimum contribution of 3% required by law, bringing your total monthly payment to at least 8% of your salary.
Are you looking for pension advice?
Veracity Financial Planning offers financial planning and advice covering pensions, insurance, investments, and mortgages. Veracity FP typically works with individuals or families who have accumulated or expect to accumulate, a large value of assets together with a lifestyle that should be sufficient to last a lifetime, but not necessarily sufficient to be unconcerned with the safety and security of their assets and their lifestyle.