A personal pension is a long-term savings vehicle that you use to put money away for retirement. Once you’ve stopped working, you can use your pension to fund your lifestyle in your later years.
The earliest you can access a pension is age 55, at which point you can opt to draw money from your pension pot or exchange it for a regular income for life, known as an annuity.
A personal pension is a type of defined contribution pension scheme. This means that the income you receive in retirement is defined by the contributions you make throughout your working life and the performance of your investments, less any fees and charges.
There are three main types of personal pension you can take out as an individual:
To incentivise and reward pension saving, the government offers pension tax relief at your highest marginal rate on payments you make into the pension scheme providing you’re under 75 and within your annual allowance.
Everyone gets 20% tax relief (the basic rate of income tax) automatically on their pension contributions ‘at source’. If you’re a higher (40%) or additional (45%) taxpayer, you’ll need to claim back the tax relief on your tax return. Don’t forget to do this; after all, it’s free money!
This means a £100 gross pension contribution requires an investment of:
Even if you’re not working or have very low earnings you can still pay into a pension. If you’re not earning at all, the maximum amount you can pay in each year is £2,880, which the government will top up to £3,600 with tax relief.
For most employed people, you’ll likely have been automatically enrolled into a workplace pension under auto-enrolment. This will be a pension arrangement that both you and your employer make contributions to. The addition of employer contributions is incredibly valuable as it will allow your pension to grow faster.
If you’re offered a place in a workplace pension with employer contributions, the vast majority of people would be best taking their employer up on this.
This said, even if you’re employed, this doesn’t stop you opening your own personal pension on the side to supplement and boost your pension savings. Your employer may even offer to pay into your personal pension, although they’re under no obligation to do so.
Meanwhile, if you’re self-employed, a contractor or a director, you won’t have a pension arranged for you by an employer. You’ll have to make pension arrangements for yourself. It’s here you can use personal pensions to bridge the gap.
While you won’t get pension contributions from your employer, directors and contractors can get notable tax relief on pension contributions made via their limited company.
You can open a personal pension yourself without any advice, but there’s a lot to consider to ensure you’re getting it right and making the best move for your retirement. For example, you’ll have to take into account:
With so much to consider when setting up a pension — after all, you’re essentially arranging something that will have a huge hand in your financial future — you can see why many people are concerned about getting it right.
John Spink
Head of Financial Planning at Drewberry
How much you should be saving into a pension depends on the retirement you want to have.
Our Pension Pot Calculator below can work out how much your pension might be worth at retirement given its current size and the contributions you’ll be making across your working life based on three different rates of growth.
This should enable you to see if you’re going to be able to afford the retirement you want or whether you need to make any adjustments to meet your goals and aspirations.
While the calculator can help, it’s no substitute for speaking to an expert and getting a proper financial plan.
At Drewberry, we have the in-house financial modelling software necessary to map out your retirement down to the last penny, showing you exactly what’s going to be affordable and giving you forewarning to make any adjustments to your savings if required while there’s still time.
Drewberry has produced an extensive guide on what a good pension pot at age 55 looks like, whether you’re planning to purchase an annuity or enter pension drawdown.
Essentially, if you were 67 tomorrow and looking to retire on an income that replicates the average UK wage then, also taking the state pension into account, you’d need a pension pot worth £370,500 to buy an annuity and almost £600,000 for pension drawdown.
However, when it comes to pensions and retirement planning, there’s no one size fits all approach. It pays to have personalised advice so you know exactly where you’re heading in retirement and can make any adjustments necessary during your working life if it appears you’re not going to get the retirement you deserve.
A good financial plan can help you make the right decisions when it comes to your finances. Make the right decisions today to build a more prosperous future.
Good financial planning with clear goals can increase your retirement income by as much as 53%. Old Mutual Redefining Retirement Survey
We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as planning our finances. Below are just a few reasons why it makes sense to let us help.