Retirement is a huge milestone in anyone’s life, so it’s essential that you prepare for it properly. A personal pension is the ideal way to help you do this if a workplace pension isn’t available to you.
Personal pension plans tend to be straightforward and flexible to make it as easy as possible to save for your retirement, but how do you set up a personal pension?
We’ve put together this handy guide to answer all your personal pension questions. We’ll discuss everything you need to know about setting up a personal pension in the UK, as well as what a personal pension is, how they work, their benefits, tips on finding a personal pension, and so much more.
So, let’s get started! Here’s how to start a personal pension in the UK.
It’s a topic swamped in complex jargon, but a personal pension is actually something rather simple.
Essentially, a personal pension is a pension that you arrange yourself. Sometimes referred to as defined contribution or ‘money purchase’ pensions, they offer a tax-efficient way of investing for retirement.
The money you pay into a personal pension is put into investments by the pension provider. The amount of money you eventually get out of your personal pension will depend on a number of factors, such as:
There are two main types of personal pension that you can choose from. These include:
The main difference between a SIPP and a personal pension is the investment options available and the way they charge.
Personal pensions typically charge a percentage fee, whereas SIPPs usually have fixed fees. Which type of pension is most cost-effective for you will depend on your particular circumstances.
Meanwhile, you typically have a lot more choice when it comes to SIPPs compared to personal pensions. However, from an investment choice perspective, most modern personal pension contracts can offer a wide choice of investments.
Personal pensions are usually provided by insurance companies, often through banks and building societies, and sometimes through a workplace.
If your employer does offer a pension scheme, it’s a good idea to check whether it’s a personal pension scheme or an occupational pension scheme – they’re not the same and the benefits you get at the end will be different.
Anyone can contribute to a personal pension. This means that you could pay into your spouse’s pension, or even set up a personal pension for your child, to ensure they have an income in later life.
So, does that mean your employer has to contribute to your personal pension?
No. If you set up a personal pension for yourself, your employer is not obliged to pay into it. Therefore, if you qualify for a workplace pension, it might be preferable to join this rather than arrange your own.
However, some employers do offer a personal pension as their workplace pension. If this is the case, they will pay into your pension.
So, how do you start a private pension and can you set up your own?
The answer is simple: yes! Anyone can set up a personal pension and this could be a particularly likely option if you’re not employed and don’t have access to a workplace pension.
Setting up a personal pension plan should be relatively simple – just follow the steps below:
If you’re thinking about setting up a personal pension, it’s important to weigh up the pros and cons.
The benefits of a personal pension include:
As soon as you turn 55 (57 in 2028), you can start to draw from your personal pension.
At this point, you can take 25% of your pension as a tax-free lump sum, or you can withdraw smaller amounts, where the first 25% is paid tax-free and the remaining 75% taxed at your own marginal rate of income tax.
While it is your age, rather than your working situation, that determines when you can access your personal pension, it is sensible to avoid withdrawing from it before you retire, if you can. This not only maximises the amount of time your money has to compound, but it also minimises the risk of you running out of money during retirement.
Once you do start to access your personal pension, it is a good idea to get financial advice to ensure you use your pension savings in the best way possible.
When it comes to auto-enrolment workplace pension, there are minimum contribution levels, but, if you can afford it, you should try to contribute more to your personal pension.
The standard advice for how much you should contribute to your private pension is ‘as much as possible, as early as possible’.
As a rough rule to determine how much you should be contributing, take the age you start your pension and halve it. Then, put this percentage of your pre-tax salary into your pension each year until you retire.
For example, someone starting their personal pension at age 32 should contribute 16% of their salary for the rest of their working life. While this might seem like a huge commitment, this figure also includes your employer’s contribution.
Here are our top tips for how to choose a personal pension plan from the many available on the market:
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