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Are private pensions worth it?

A private pension can be a great way to save for your retirement.   Generous tax breaks and the potential for long-term growth, along with a 25% tax-free lump sum are just some of the benefits of a private pension. 

Leaf Financial Advisers Ltd. - Trusted Pension Advisers

What is a private pension

Quite simply a private (or personal) pension is a pension you set up yourself, as opposed to one set up by your employer or the government.  They are a flexible and tax-efficient way of saving for your retirement. You can pay money into your pension from between 18 and 75.  You can start to take money out of your pension from as early as age 55 (due to rise to 57 in 2028). 

You can receive tax relief on the contributions you make into your private pension, and your pension pot is able to grow free of income and capital gains tax.  You can hold a private pension as well as a workplace one and you can even have more than 1 private pension if you so wish.

There are a wide variety of different providers of private pensions, with most of these being “defined contribution” pensions where the money you contribute is invested to hopefully grow over time to provide you with a pot of money to fund your retirement.

Why is it important to have a pension

As we continue to live longer it becomes more important to make sure that we put enough aside to ensure we can live the retirement we deserve.  Simply put a private pension can be a great way to put money aside for your retirement.

Retirement itself is also no longer as straightforward as it once was. Many of those reaching retirement age are deciding to reduce hours first to make a more gradual shift to ending their working life or alternatively some are able to stop working a lot sooner than the state pension age. Having a healthy retirement and pension plan can allow a lot more flexibility when deciding what to do in later life and when your retirement may begin.

With potentially decades spent in retirement, relying on your built-up pension savings, it is vitally important to make sure that you put the right plan in place as early as you can.  Making the money you save over your working life work in the best way for you, can make a huge difference to the retirement you have.

Is it worth paying into a private pension?

Many people wonder if it’s worth paying into a private pension.  Some may already have a workplace pension or believe that the state pension will be enough to support them in retirement and wonder what the need is for their own private pension.  Whilst it may be true that some will have enough income from just the state pension to live the retirement they want, unfortunately, many will find that the UK state pension (currently paying a maximum of £185.15 in 2022/23*) does not pay enough.

With the benefit of long-term investing, contributions that are invested are able to grow tax-free and benefit from compound interest, which should result in the growth of your pension pot over the years.  Even small amounts of contributions, given enough time to grow, can turn into a significant sun that can boost the quality of your retirement.

The government also incentivises you to pay into a private pension with several tax breaks, both when you put in money and when you take it out.

There are costs involved with a private pension, and you need to make sure that any costs you face are likely to more than make up for the benefits of having a pension.  There are a wide range of providers with different offerings and costs, and finding the right one for you could be very beneficial for your later life and your future self will certainly think it was worth paying for a private pension!

Is a private pension better than a workplace pension?

With auto-enrolment almost all employees should be eligible for a pension offered by their employer ( a “workplace pension”) with the advantage that the employer will arrange it all and also make contributions into the pension alongside yours.  However, there may be drawbacks with the pension plan chosen by the employer, such as high costs and lack of choice, which may mean a private pension may be better, although it is always almost impossible to find something better that makes up for the loss in employer contributions if you were to leave the workplace scheme.  Often having a workplace and a private pension can be the solution.

If you would like to know more about the difference between workplace and private pensions and which one is right for you, then please read our more detailed article on whether private pensions or workplace pensions are better.

Some of the advantages of having a private pension

  • A private pension can benefit both from tax relief when paying into the pension and a tax free lump sum when withdrawing.
  • Investments in your pension can grow free from capital gains tax and dividend tax, resulting in greater growth of your pot.
  • Funds in your pension pot are usually outside of your estate and so are not liable for inheritance tax.
  • You have much more control over a private pension rather than a workplace pension or the state pension.
  • You can choose how much and when to contribute.

What are the disadvantages of having a private pension

There are a few drawbacks that need to be taken into account when considering a pension:

  • Lack of access.
  • Can be complex.
  • Risk of underperformance.
  • Fees for running a pension and the underlying investments.

Though in most cases these disadvantages are more than offset by the benefits of a pension, and a pension adviser should be able to help you tackle most of the issues.

How many people have a private pension

According to the latest data from HMRC*, a total of £11.7 billion was contributed into private pensions in the 2020/21 tax year, up from £10.6 billion the year before.  However, the number of people making contributions in to private pensions fell from 9.5 million in 2019/20 to 6.8 million in 2020/21.  This is likely due to the impact of the pandemic, with people being concerned with short-term cash flow and job uncertainty and so avoiding locking money away into pensions.


What are the alternatives to a private pension?

Private Pensions are just one type of long-term retirement savings and whilst there are many advantages of pensions they shouldn’t be used before assessing other ways of putting money aside for the future.  There are other types of pensions to consider (for example does your workplace offer you a pension via auto enrolment?) and indeed many types of private pensions. Investment ISAs, Lifetime ISAs, general investment accounts, fixed term savings accounts, bonds and gilts are just some of the alternatives that could be considered.

Some of the reasons that you may choose an alternative to a private pension are that there may be lower charges, earlier access, employer contributions or some other benefit that a private pension does not provide.  A good independent financial adviser should be able to run through the options and work out if a private pension or something else is best for you, or if a combination is the most suitable.


Final thoughts on if private pensions are worth it.

There are many advantages of using a private pension, either as a standalone retirement savings pot or in addition to other pensions or types of retirement savings.

A combination of generous tax breaks and the benefits of long-term well-planned investment in your pension can result in a significant increase in the size of your retirement savings compared with other methods of putting money aside.

Flexibility in private pensions is also much greater these days, for example allowing you to pass on your pension funds to your family with (in most cases) no inheritance tax due or to access your pension early if you are unfortunate to suffer a serious illness.

Unfortunately, it can be easy to come across misinformation or out-of-date views. A quick call to a pension advisor can clear up any questions or concerns you may have and help you make the right decisions. A quick call for which your future self may be very grateful for.


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