A personal pension or private pension is a tax-efficient savings plan that enables you to save for retirement. You pay in regular amounts during your working years to create a pot of money, which you then use to take an income from in retirement.
Personal pensions are usually arranged by yourself, not your employer. Employers are obliged to set up a Workplace Pension Scheme for all eligible employees. This should be your first port of call, as employers are obliged to pay into the pension plan if you join it. However, if you are self-employed or make less than a certain amount, you are not (yet) eligible for automatic enrolment in a workplace pension, which is when a personal pension should be considered.
Your pension contributions attract tax relief (which means that for every pound you invest in a pension, the Government will pay in a top-up of 20% of the value of the contribution, up to a maximum of the lower of your annual income or £40,000 per year) and can be made in various ways, either regularly or by lump sum, or a combination of both.
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The pension pot is invested in your choice of pension funds, from the selection offered by your chosen pension provider. The idea is that the funds grow over time, maximising the value of the fund so you can get the highest possible income in retirement.
On retirement, up to 25% of your pension fund value can be taken as a tax-free cash lump sum. The remainder of the funds left in your pension pot is used to take an income, either by way of an annuity, or by taking cash directly from your pension fund (drawdown).
Most pension contributions are invested in the financial markets on your behalf by a pension provider in order to get the best return for your future. The income your pension provides you in retirement will vary from provider to provider and will depend on the investment choices you make, the performance of the pension funds, the level of contributions you make and the charges applied by the provider.
Remember: each pension company will vary in both charges and investment performance.
Pensions are a type of investment and investments are risk-based products. This means that the value of your initial investment and any income generated can fall as well as rise. If you are in any doubt we strongly urge you to contact an independent financial adviser to assist you before making a decision on which pension to choose.
Planning for retirement has never been so important. Whether you're reviewing a pension plan or looking for the best annuity rates, compare the market to get a good comparison rather than opting for the first retirement product you find.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.