Private pensions explained
Learn more about private pensions, how they work and the tax relief available
What is a private pension?
A private pension is a pension which you take out yourself rather than through your employer.
Also known as personal pensions, they are usually defined contribution pensions. The value of a private pension is built up by your personal contributions. These contributions are topped up by tax relief and then invested. This provides you with a pot of money which you can choose how to take in retirement.
You can contribute to your private pension regularly or through lump sums.
You can open a private pension if you already have a workplace. Alternatively, you can set up a private pension instead of a workplace pension.
What tax relief can I expect with a private pension?
Tax relief on private pensions is the same as on any other kind of pension.
When you contribute to your private pension, your money receives 20% tax relief which is claimed by the provider on your behalf. For example, every £80 you pay in is topped up to £100.
Higher and additional-rate taxpayers can claim back a further 20% and 25% respectively. You can claim additional tax relief via your self-assessment tax return.
Who can set up a private pension?
Anyone can set up a private pension. You can even set up a private pension alongside other pensions – such as your workplace pension.
Setting up a private pension may be beneficial if you are self-employed and do not have a workplace pension.
If you are setting up a private pension, you could set up a basic personal or stakeholder pension. These pensions tend to be easy to set up and offer a limited range of default investment funds.
Another option is a self-invested personal pension (SIPP). SIPPs allow you to choose your own investments. You can choose from a range of ready-made funds based on your attitude to risk, or choose investments based on your own research.
SIPPs are more suitable for people who are prepared to actively manage their pension.
Read more on SIPP vs Personal Pension to explore what's best for you.