Personal pensions

Personal pensions

If you want to top up your company pension, you might consider a personal pension.

A personal pension is a type of defined-contribution pension, where you choose how much you pay into it. As with any other pension, it enables you to build up a pot of money that you can use to give you an income in retirement.

You, or your financial adviser, choose which pension provider you would like to administer your pension and where you want your contributions to be invested, from a range of funds offered by the provider. This should cover the full range of investment assets - shares, government bonds, corporate bonds, cash and commercial property. The aim is to grow the fund over the years before you retire.

You get back the tax you pay on contributions you make into your pension plan, subject to the Annual and Lifetime Allowances. Your pension provider will claim tax relief at the basic rate and add it to your pension pot. For instance, if you put in £32,000, the pension provider will claim £8,000 from the government, and that will make your contribution £40,000. If you’re a higher or additional rate taxpayer, you’ll need to claim an additional rebate through your tax return – in this example, another £8,000 or £10,000.

If you are an experienced investor with the time to dedicate to managing your own investments you can do this with a Self Invested Personal Pension (SIPP).

You need to bear in mind that the tax rules governing pensions and the favourable tax treatment they offer might change in future. The value to you of this favourable treatment will depend on your individual circumstances.

Key benefits and drawbacks

  • The relatively wide choice of investment funds – compared to stakeholder pensions, and most workplace pension schemes, you’ll find a wider range of funds to choose from. Some may offer opportunities for better performance and the potential for a larger pension fund when you retire, though you need to be aware that this will come with a higher risk of loss.
  • Greater flexibility - You decide how much and how often you want to contribute. Investments can be lump sums or regular payments, and you can vary your contributions. You can have a personal pension in addition to other pension schemes, including company pensions and SIPPs. But you can’t start taking benefits from your pension until you are aged 55 and this is rising to 57 from 2028.
  • Ease of portability - your personal pension is not necessarily linked to your employer. It’s stand-alone. You might open a personal pension to supplement savings into a company scheme or take advantage of a broader range of investment opportunities. If you want to consolidate your personal pension with any other pensions you hold, you can do this, too – either within your personal pension scheme or the other pension scheme. Before transferring or consolidating pensions, remember to check you will not lose any benefits by doing so.

Is a personal pension right for me?

Because the choice of investment funds is wider for personal pensions than for stakeholder pensions, you might pay higher charges. SIPPs offer the widest choice of investments but are generally only suitable for more experienced investors who have the time to manage their own investments.

A personal pension may suit if you:

We don’t advise you on the suitability of pension types for you. If you are in any doubt, you should seek independent advice.

How much will I get when I retire?

If you do opt for a personal pension, the value of your pension pot at retirement depends on:

  • the amount of money you pay into it
  • how well your chosen investment funds perform over time – remember that the value of the investments held in a pension can fall just like any other investment
  • the level of price inflation experienced over the time
  • the charges you’ll pay
  • the size of any lump sum you choose to take or draw down at retirement.

Remember:

  • Please be aware that tax rules can change and the value of tax relief will depend on your individual circumstances.
  • SIPPs are not for everyone. You need to have the necessary skills to invest your own pension fund as the value of investments can fluctuate and you could get back less than you invested.
  • All the investments that you might hold in a personal pension can fall in value. There is always a risk that your fund may end up less in value than you put in.

Remember:

  • Please be aware that tax rules can change and the value of tax relief will depend on your individual circumstances.
  • SIPPs are not for everyone. You need to have the necessary skills to invest your own pension fund as the value of investments can fluctuate and you could get back less than you invested.
  • All the investments that you might hold in a personal pension can fall in value. There is always a risk that your fund may end up less in value than you put in.
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