How to Start a Private Pension UK

Everything You Need to Know About Setting Up a Private Pension

how to start a private pension

A Guide to Setting Up a Personal Pension

how to start a personal pension

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. 

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What is a Personal Pension?

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: 

  • – How much you pay in
  • – How the fund’s investments perform
  • – How you choose to take your money 

Different Types of Personal Pension

There are two main types of personal pension that you can choose from. These include: 

  • Stakeholder pensions – these must meet specific government requirements e.g. limits on charges 
  • Self-invested personal pensions (SIPPs) – these let you have more control over the specific investments that make up your pension fund

What’s the Difference Between a Personal Pension and a SIPP? 

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. 

Who Provides Personal Pensions?

how to start a private pension

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. 

Can My Employer Pay Into My Personal Pension? 

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.

How to Set Up a Private 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: 

  1. Choose a personal pension provider
    Different personal pension schemes charge different fees, all of which will influence the final size of your pension pot.

  2. Choose your investments
    The investment options on offer vary between personal pension providers. So, if you know what type of fund you’d like to invest in, make sure it’s offered by your chosen provider. If you’re not sure where to begin, personal pension providers tend to offer ready-made investment portfolio options, based on how much risk you’re prepared to take.

  3. Contributing and managing your personal pension
    To set up a personal pension, you’ll need your bank details and National Insurance number to hand. Once you’ve opened your personal pension, you can choose to make regular contributions via direct debit as well as one-off payments. Your pension provider will claim basic-rate tax relief from the government and automatically add it to your pension pot. 

What are the Benefits of a Personal Pension?

how to set up a personal pension

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: 

  • Tax benefits
    Any money you save into your pension will receive tax relief. Therefore, whatever contribution you make to your pension pot means more money in your pocket and less going to the government.

    These tax benefits also continue when you retire. When you reach retirement age, you can take 25% of your pension fund as a tax-free lump sum. Any funds that are left over will be paid to you as income and taxed at normal levels, depending on your income in any one year.

  • Anyone can contribute
    You can set up a personal pension plan regardless of whether you’re employed, self-employed or not working. In addition to any contributions you make, other people can also pay into your personal pension.

    If you’re employed, your employer can contribute to your personal pension scheme. If you have a spouse who is out of work, you can help them save for retirement by paying into their pension. Or, you may wish to help your child or grandchild get a head start in saving for their future.

  • Flexibility
    Most modern personal pension schemes are both flexible and portable. So, if your circumstances change (e.g. you start a new job or stop working) you can continue to contribute to the same pension plan.

  • Guaranteed retirement income
    When you reach retirement age, you can take up to 25% of your pension as a tax-free lump sum and take any remaining funds as income directly from your pension pot. Taking an income this way means you could still benefit from returns on the investment your pension’s in.

    Alternatively, you could use your pension funds to purchase an annuity and provide a guaranteed income for your later years.

  • Earn compound interest
    The sooner you start contributing to a pension, the more you can benefit from the compound interest you earn. Whenever you make a payment into a pension, you also start making returns on the investment.

    In the first year, you’ll be able to take advantage of the interest returns on your initial contribution. In the second year, you’ll not only earn interest on the initial contribution but also on the first-year return, and so on.

When Can I Draw My Personal Pension?

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. 

How Much Should I Contribute to My Private Pension?

how to set up a personal pension

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.

Tips for Choosing a Personal Pension

There are hundreds of personal pensions on the market – from AJ Bell and Aviva to BT, Barclays and the NHS. Thus, choosing between them all can seem like an almost impossible task. 

Here are our top tips for how to choose a personal pension plan from the many available on the market: 

  • Compare different providers – shop around to give yourself as much choice as possible and take your time to gather as much information as possible before deciding.


  • Compare products from different providers – take a look at each pension plan offered by a provider in detail to determine which suits your needs best.


  • Ensure you can afford the contributions – for some plans, there may be a minimum payment. So, if you’re on a tight budget or have irregular income, check whether you’ll have to commit to regular payments or if you can vary how much and when you pay.


  • Check what charges you’ll have to pay and when – these could include administration fees, transfer charges, management charges, and even penalties if you miss a payment or take your pension early.


  • Look at how the funds will be invested – make sure you look at all the choices you have and that you’re happy with the level of risk you’re taking.


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