A private pension is essentially an investment account that you set up to save towards your retirement, and benefit from tax relief on your contributions.

You may set up a private pension (also known as a personal pension) if, for example, you don’t have access to a workplace pension scheme, perhaps because you’re self-employed, you want to boost your overall retirement savings, or you’ve decided to combine your pensions into a single plan.

There are different types of private pensions, including stakeholder plans, standard personal pensions, and self-invested personal pensions (SIPPs). They vary widely in terms of investment choice, and charges, so it’s important to choose the right one for you. Ultimately, though, how much you receive at retirement will depend on the contributions you’ve made into the pension, tax relief received, and investment performance over time, after charges.

Here, we look at how private pensions work, and the different options available to you.

What is a private pension?

A private, or personal pension, works in a similar way to a workplace pension, but it’s set up by you, rather than your employer.

Private pensions are defined contribution pensions (also known as money purchase plans). A defined contribution pension is a type of pension where the amount you receive when you retire depends on how much you have paid into your pension and how the investments made on your behalf have fared. The major difference to a workplace defined contribution scheme is that you won’t benefit from employer contributions on top of the money you choose to pay into your pension.

You still receive tax relief on your contributions into a private pension, boosting your retirement pot and increasing the amount that’s invested to grow over time (find out more on tax relief below). Unlike most workplace pension schemes, there isn’t a set minimum contribution level into a private pension. There are plenty of flexible options available that enable you to pay from just £20 a month.

Once opened, you can choose to pay a regular amount into your pension each month, or make lump sum contributions when you can afford to do so.

Find out more about how defined contribution pensions work in our article What is a defined contribution pension?

Get a free no-obligation pension consultation

Pension advice can help you get the most out of your retirement income, helping you on your way to a secure financial future. If you have more than £75k in pension savings, take the first step by arranging a free, no-obligation initial consultation with an expert from Aviva Financial Advice. Any recommendations advisers make will be for products from Aviva and other carefully selected partners. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved. Capital at risk.

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Where will your money be invested?

Any money invested in a private pension will be placed in stocks and shares. This may be in the form of a one-size-fits all ‘default’ fund, or a range of funds within a ready-made portfolio of your choosing, for example. Or, you may want a pension with a wider range of asset choices, such as individual shares, property, and gold.

Some private pensions, such as self-invested personal pensions (SIPPs), offerhave a much wider variety of investment options than others. Ultimately, it’s up to you which provider and plan you choose, and which investments you hold, but investing in the stock market gives you the greatest chance of long-term growth.

Chances are, whichever type of private pension you choose, you’ll be given some investment choice. Most pension providers offer online guidance on which investment option may suit you, depending on your attitude to age, and attitude to risk. If you’re unsure where to invest, you may choose to seek the help of a financial adviser.

Find out more about getting the right advice on where to invest and which pension to choose in our article How to get advice on your pension.

When might you set up a private pension?

There are plenty of reasons you might choose to set up a private pension. You can have a private pension if you’re employed, self-employed, or not working, so opening an account isn’t reliant on your employment status. Some reasons you might want to open one include:

  • You’re self-employed and don’t have access to a workplace pension, and want to save towards your retirement. Find out more in our article Pensions for the self-employed.
  • You’re not currently working but you’re able to pay into a pension and want to continue building your retirement savings. You’re able to receive tax relief on any contributions that you, or anyone else such as your husband or wife, pays into your pension up to a maximum of £3,600 in a tax year. Learn more in our article Can my husband or wife pay into my pension?
  • If you have access to a workplace pension, you can still open a private pension. You will not receive employer contributions in addition to the sums you pay into your pension, but if there are specific investments you want to access, for example, a private pension may offer a solution. However, it’s generally wise to maximise your employer’s contributions into a workplace pension, as these can be thought of as a delayed pay rise that you’ll receive in retirement.
  • You may want to consolidate previous workplace pensions into a single private pension that you can continue contributing to, so that your retirement savings are easier to manage. It’s important to check that you’re not giving up valuable pension guarantees though by, for example, transferring a final salary pension. Always speak to a financial adviser in this scenario. Find out more in our articles Should I consolidate my pensions? and Should I transfer my final salary pension?

How does tax relief on private pensions work?

When you pay into a private pension you will receive tax relief at your marginal rate. Your pension provider will claim this for you at the 20% basic rate and automatically add this amount to your pension. So, you’ll only need to pay in £80 to your pension to receive £100, as the government essentially adds the £20 it takes in income tax.

If you’re a higher-rate taxpayer, you can claim 40% in tax relief, so a £100 pension contribution would only cost you £60. You’ll need to claim the additional 20% on top of the basic rate through your tax return. Similarly, additional rate taxpayers receive 45%, effectively paying £100 into their pension at a £55 cost to them.

You can find more information on how tax relief on your pension contributions works in our article How pension tax relief works.

When can you access your money in a private pension?

You can access your money in a private pension when you reach the age of 55 (rising to 57 from 2028). Before then, you are unable to withdraw your money. However, if you develop a serious illness, you may be able to take an income and/or lump sums from your pension earlier than this, depending on your provider’s rules.

Some providers allow you to access your pension early if, say, you’re unable to return to work due to physical or mental illness, while others may state that you must be unable to do any job. Check your provider’s particular terms for more details.

How can you use the money in your private pension?

You can do as you wish with the money in your private pension from age 55, since the introduction of pension freedoms back in April 2015. You can take up to 25% as a tax-free lump sum from your pot, with the tax for any further withdrawals taxed at your marginal rate (similarly to income tax). Find out more about how to manage your tax-free cash allowance in our article Should I take my tax-free pension cash at 55?

Aside from taking the tax-free cash lump sum, your options include:

  • Doing nothing, and leaving the money in your pension to grow, which may be suitable if you’re continuing to work, for example, and have other means of providing an income that means you don’t need access to the money in your private pension.
  • Using a pension drawdown plan to withdraw an income from your pension while leaving the remainder invested. Read more about how this works in our article New pension drawdown rules explained.
  • Withdrawing some, or all, of your pension as a cash lump sum, perhaps to boost your income. However, make sure to manage withdrawals carefully to avoid unnecessary tax charges. Read more on this subject in our article Should I use my pension to boost my income?
  • Buy an annuity with some or all of your pension money to provide a guaranteed income for life.
  • A mix-and-match approach to your options, depending on the size of your pension, and to provide you with the greatest income in retirement with the level of risk you’re comfortable with.

It’s entirely up to you what you do with the money in your private pension. You can find out more in our article Your pension options at retirement.

How much can you pay into a private pension?

There isn’t a limit on how much you can pay into your pension each year. However, there is a cap on the amount you can receive tax relief on from the government, and on how much you can pay into pensions over your lifetime without triggering additional tax charges.

Annual Allowance: You can get tax relief on your pension contributions up to 100% of your salary, or £60,000 in 2023/24 – whichever is lower. This is the total sum of any personal contributions, and tax relief received (including anything paid into workplace pensions, too).

If you pay more than your annual salary, or the £60,000 annual allowance, into your pension, your contributions will be subject to a charge (in line with income tax). However, you can carry forward any unused annual allowance from the previous three years, using this in addition to your current year’s annual allowance. This can be useful if you’re working and approaching retirement, for example, to increase the amount you have saved in your pension.

Money Purchase Annual Allowance (MPPA): Bear in mind that if you’re currently retired and drawing money from your pension, your annual allowance for pension contributions may fall to a maximum £10,000 a year, known as the money purchase annual allowance (MPAA). If you plan on withdrawing money from your pension and want to carry on contributing to it, it may be sensible to seek financial advice.

Your annual pension allowance may also reduce if your income exceeds £260,000, by £1 for every £2 of income over £200,000. The maximum amount your allowance may reduce by in these circumstances is £50,000, to £10,000.

Previously, you would have also had to consider the Lifetime Allowance which was the limit on the value of your pension benefits you can receive in your lifetime without paying additional tax charges. However, the Lifetime Allowance was abolished on 6 April 2023, so this no longer applies.

You can find out more about these allowances in our article How do pension allowances work?

Calculate your pension

Use the Rest Less pension calculator to find out how much you might need to save for retirement, how much your pension pot could potentially be worth and how long it could last.

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How do the different types of private pension work?

There are three main types of private pensions: stakeholders, standard personal pensions, and self-invested personal pensions (SIPPs). Which is best for you depends on how much investment choice you want, how much you want to contribute, and how comfortable you feel picking your own pension investments.

Stakeholder pensions

These were introduced in 2001 with the aim of simplifying pensions and reducing charges. Charges are capped and they usually offer a simple, default investment fund so you don’t need to choose where your money is invested.

You can make small contributions into a stakeholder, often from just £20 a month, so they can be an option if you cannot afford to save much each month, and you may be able to stop and start your contributions if necessary which may be useful if you are unsure about paying in a set amount each month.

Standard personal pensions

A personal pension offers a wider range of investment funds to pick from than a stakeholder. You choose which funds are suitable for your pension savings, depending on how much risk you are prepared to take, your personal preferences (some offer environmentally-friendly investment options, for example), and how long you have until retirement.

You can usually find guidance on the provider’s website on which funds or ready-made portfolio of funds is most suitable if you want to take more risk, or a more cautious approach to investing, perhaps if you’ve little time to go until retirement.

SIPPs (self-invested personal pensions)

SIPPs are essentially a type of ‘DIY’ pension, enabling you to choose where your retirement savings are invested.

You may pay for a financial adviser to manage your SIPP, or manage the account yourself, depending on how experienced an investor you are, and how much time you have to keep an eye on your pension and choose/change investments.

A SIPP enables you to invest in a wide range of investments from different providers, rather than giving you access to the pension funds of a single provider. You can choose to invest, for example, not only in shares, fund and bonds, but also gold and commercial property, and other more esoteric investment options such as forestry.

Any returns are protected from income tax, tax on dividends and capital gains tax. You’ll also receive tax relief on your contributions at your marginal rate.

The amount you eventually receive on retirement from a SIPP will depend on how much you’ve paid in over the years, and how your chosen underlying investments have performed.

You can find out more about how SIPPs work in our article Everything you need to know about SIPPs and about other types of pension in our guide What are the different types of pension?

What is the best private pension?

The best private pension for you will depend on your personal circumstances, your retirement goals, and how much control you want to have over your pension investments.

For example, if you’re an experienced investor or you want plenty of investment choices, a SIPP or personal pension could be the best option for you. However, if you only have a small amount to save into your pension each month then a low cost Stakeholder pension could be more suitable.

Get a free no-obligation pension consultation

Pension advice can help you get the most out of your retirement income, helping you on your way to a secure financial future. If you have more than £75k in pension savings, take the first step by arranging a free, no-obligation initial consultation with an expert from Aviva Financial Advice. Any recommendations advisers make will be for products from Aviva and other carefully selected partners. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved. Capital at risk.

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Where can you get a private pension?

There are hundreds of private pensions to choose from, with a growing number coming onto the market from online investment managers. You can typically pick from a range of ready-made portfolios, choose the investments yourself, or seek the help of a financial adviser to do this for you.

You can also often choose from ready-made fund portfolio options from online investment platforms such as Nutmeg.com and Wealthify.com which may be a simple way to get started. Before you sign up, make sure you are comfortable with the charges you’ll pay, and overall investment choice on offer from your provider.

There are a growing number of SIPP providers to choose from, with options including Vanguard, Hargreaves Lansdown*, AJ Bell and Interactive Investor*. Bear in mind that SIPP charges can be higher than personal pension charges, given the wider investment choice. But how much you pay will often depend how often you trade, and which investments you want access to.

Also note that fully-fledged SIPPs typically have higher charges than low-cost SIPPs, if you want access to a wider range of investments. Typically, though, people choosing these typically invest between £150,000 and £450,000, according to consumer association Which?. Most people will find a low-cost SIPP a perfectly suitable option with sufficient investment choice to save towards retirement.

If you’re not comfortable going it alone, a good financial adviser can help to choose the right private pension for your personal circumstances, alongside which investments to hold in it, including specific recommendations based on your individual circumstances.

If you think this would be helpful you can find a local financial advisor on VouchedFor or Unbiased or check out our guide on How to find the right financial advisor for you.

If you’re considering getting professional financial advice, Aviva is offering Rest Less members a free initial consultation with an expert to chat about your financial situation and goals. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.