What is a Private Pension and how does it work?

Last Updated on 26 October 2022 by Dan

Hello everyone! At the Financial Wilderness we’re big fans of saving into a private pension. It’s something many overlook in respect of more immediate financial needs, but it’s really important to consider if you’re leaving enough for retirement. We’ve written more detail about the benefits of pensions here.

Today we have teamed up with the good folks at Moneyfarm, one of the biggest online investment advisers in Europe to highlight more details on private pensions.

Please be aware this post is sponsored content. Moneyfarm is a regulated investment provider but per our usual editorial policy all content here is intended as general guidance rather than regulated financial advice – you should always do your own research too!

What is the private pension? How does it work?

Nowadays people who live in the UK have many ways at their disposal to create a plan for their future. That’s exactly what pensions are for: they have been created to give citizens the chance to be able to count on an income they can live on when they stop working

Today, among the most common pension funds there is the private pension, which can also be called personal pension. It consists of a scheme specifically designed for independent workers and freelancers. Unlike the workplace pension, which today represents another popular choice, self-employed workers can’t count on the employer contribution. However, the private pension comes with many benefits as well, for it gives the holder the chance to choose how often to deposit on the fund. When opening one, you are also free to choose the amount of money you want to put in your trust. Just like it happens with any other kind of retirement trust, when you put money into a private pension, it is always invested by the pension provider. This rule has been designed to give your capital a chance to mature over the years, but it also put your money at risk, since the outcome will depend of the performance of the investments. If you want to find out more about the private pension, its features and rules, and the other types of schemes available for British citizens, keep reading. In the following paragraphs, we’ll go deeper into this matter.

Saving a private pension into a ceramic pig with Moneyfarm

What are the other pensions available in the UK?

The private pension isn’t obviously the only plan available for people who live in the UK. In fact, you can choose between two other types of pensions. The most widespread retirement plan is currently the occupational pension, which is called workplace pension as well. It is indeed a scheme meant to provide employees with an income they can live on at the end of their working years. When choosing this type of pension, you’ll be able to count on the support of your employer, who will be required to monthly contribute to the creation of your pension pot by depositing a fixed percentage of your salary. Just like it happens with the private pension, the funds you and your employer deposit are always invested by the pension provider. Once again, this means that you may end up with less or more than expected, for the outcome of every investment is always unpredictable. This particular type of occupational pension is called defined contribution pension scheme. You can also opt for the defined benefit pension scheme, which works a little differently: in fact, you’ll be granted a pre-determined amount as soon as you reach your pensionable age. 

The other pension scheme you can choose is called state pension, which consists of a regular payment made by the British Government according to your previous National Insurance contributions. This type of pension comes with very strict rules: in fact, you have to be entitled to it in order to be able to get it. If you’re a woman, you have to be born on or before 5 April 1953. As for men, they must be born on or before 5 April 1951. If you fall under this category of people you have to claim your pension in order to get it. If you’re not eligible for the state pension, you can still opt for the new state pension.

What is the retirement age?

As you can see, today you have a great diversity of choices when it comes to opening a pension fund. Before opening one, you should know about the features that apply to every scheme available. First of all, you’ll always be able to count enjoy tax relief, which will always be applied by the British Government. Secondly, a date has been set for holders to be able to withdraw the money they put aside. In fact, when you open a pension fund you won’t be able to access your savings until you reach your retirement age. This rule is meant to help you collect enough money to financially support yourself in the future, for it completely deletes any kind of temptation of withdrawing your money before you really need it. In the United Kingdom, the pensionable age can change depending on the plan you choose to open. For instance, it has been set at 55 years old for the private and occupational pension, and at 66 years old for the State pension. Also, as stated above, you should always remember that the pension provider will always invest the money in your fund. This means that in the future you might get less than expected. Lastly, depending on the plan you choose, you’ll also have the chance to defer your pension.

Any questions?

Thank you to Moneyfarm for today’s content – if you have any other general questions on pensions, please do feel free to comment below!

And that’s it!

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