How do private pensions work?

Private pensions are defined contribution plans, which invest all your payments. The amount you have when you retire is determined not only by how much you’ve put in, but also by how well your investments have performed and how much you’ve been charged.

How do I start a private pension?

If you are employed, your employer will offer you a pension scheme when you join. If you are self-employed, a company director, or you own your own Ltd Company, you can start your own pension very easily into which you or your firm can pay into. The earlier you start, the longer the contributions will have to grow and benefit from compound growth.

Because your life expectancy is less as you become older, your pension payments will be larger the older you start making them. Depending on your arrangements with the pension provider, you can normally draw your personal or stakeholder pension at the age of 55. To receive your personal pension, you do not need to be retired from employment.

How is a private pension paid out?

When you contribute to your personal or stakeholder pension, you are building a pension fund that will provide you with income in retirement. When you reach retirement age, you can start receiving your pension by arranging payments with an insurance company or a pension provider.

You can decide how you take money from your pension pot. You should ask your pension provider what options they offer.

In most schemes you can take 25 per cent of your pension pot as a tax-free lump sum. You’ll then have 6 months to start taking the remaining 75 per cent – you can usually:

  • get regular payments (an ‘annuity’)
  • invest the money in a fund that lets you make withdrawals (‘drawdown’)

Depending on your scheme, you may have other options. You get 25 per cent tax free when you

  • take a whole pension pot worth up to £10,000 as a lump sum
  • withdraw cash from your pension pot (‘uncrystallised funds pension lump sums’)

These options apply to you if you’re in a defined contribution pension scheme – a pension pot that’s based on what you or your employer paid in.

Is it worth having a private pension?

The answer is yes for a lot of people. While pensions are a complicated topic, there’s no doubting that most of us would want more money in our retirement years than the Government Pension will provide. Some people set up a personal pension because of the tax benefits they receive from both their contributions and the 25% tax-free lump payment they receive when they retire, but keep in mind that this isn’t true for everyone.

To determine whether a private pension is the best option for you, you’ll need to consult with an expert about your needs and circumstances, as well as go over all your options.

A personal pension plan is not required, and if you have a pension through your employer, you may feel that your retirement income needs are already met. However, it’s always a good idea to double-check that your assumptions about your pension arrangements delivering income at the desired rate in retirement are correct.

How much can I contribute to a personal pension?

In general, you can contribute up to £40,000 to a pension scheme in a single tax year, but not more than your yearly earnings. If you have no income, you may pay up to £2,880, which the government will match with tax relief, for a total contribution of £3,600.

If you had a pension fund in the preceding three years but did not contribute the entire £40,000, you may be allowed to contribute more than £40,000. This is known as using ‘carry forward.’

When making a personal contribution, you cannot contribute more than your current year’s earnings when using carry forward; however, if the pension contribution is made by your employer or limited company, the £40,000 limit can be waived if HMRC considers the pension contribution to be wholly and exclusively for the employer’s trade or profession, which you should check with your accountant.

Looking for pension advice?

Veracity Financial Planning offer financial planning and advice covering insurance, pensions, investments, and mortgages. Veracity FP typically work 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.

Contact Veracity Financial Planning now. Call 0115 967 0888 or email:


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Woody Snapper

Woody works with individuals and business' looking for corporate finance, high net worth mortgages, complex loans, bridging loans and development finance.

To contact Woody.

Tel: 07922 413586