How Do Personal Pensions Work?

I understand that any pensions I accumulate will provide me with an monthly income once I’ve retired, but I don’t understand how the funds within the pension accumulate overtime. How do personal pensions work?

Question asked by Julie Pearce
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Answered by Andrew Jenkinson

When you start a pension, you make monthly contributions into the scheme. If you’ve joined your employer’s workplace pension, they will usually contribute to the plan on your behalf too.

Pension contributions and tax relief

These contributions also benefit from tax relief. If you’re a basic rate taxpayer, you’ll get 20p in tax relief for every pound you make in pension contributions. If you’re a higher rate taxpayer you’ll get 40p in tax relief for every pound you pay in and 45p if you pay tax at the 45% additional rate (accurate as of April 2017).

To calculate the tax rebate you’re due on your pension contributions, use the Drewberry Pension Contributions Tax Relief Calculator →

How your contributions are invested…

Contributions are then invested in the financial markets, such as the stock market, by your pension provider. The aim is that they will grow over time, leaving you with a big lump sum which can be used to provide you with an income once you retire.

Pension Fund Performance

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This information does not constitute financial or other professional advice. You should consult your professional adviser or contact us directly on 02084327333 should you require financial advice. It is important to ensure any insurance policy you take out is suitable for your needs.
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