1. What are the differences between personal pensions and workplace pensions?
Although personal pensions and workplace pensions are both types of defined contribution pensions, they function differently. A personal pension is set up yourself, allowing you to choose the provider and make arrangements for your contributions to be paid. If you’re self-employed, you can set this up. They offer a tax-efficient way to save for retirement, with the government adding to your contributions as tax relief at the basic rate.
Workplace pensions, on the other hand, are set up by your employer with both you and your employer contributing to the pension fund. In addition, the government also contributes in the form of tax relief. One of the benefits of workplace pensions is that employers contribute to your pension pot. In many cases, the more you contribute, the more your employer will contribute.
2. Can I take a tax-free lump sum from my pension pot?
Yes, you can take up to 25% of your pension pot as a tax-free lump sum once you reach the age of 55, applying to both personal pensions and workplace pensions. The remaining 75% can be used to buy an annuity, placed into pension drawdown, or taken as cash, although you’ll pay tax on this.
In terms of tax efficiency, pensions offer significant benefits. The government adds to your pension contributions in the form of tax relief. Plus, you can usually take a portion of your pension pot as a tax-free lump sum when you retire.
It’s worth noting that taking a large lump sum could push you into a higher tax bracket, so planning your withdrawals carefully is essential. Additionally, taking a large lump sum early could mean your pension pot has less chance to grow and you could run out of money in retirement.
3. How are pensions invested to grow my retirement fund?
Pension providers invest your pension contributions in various ways to grow your pension pot. This could include investments in the stock market, in government bonds or in other types of assets. This works to increase the value of your pension pot over the long term.
However, It’s important to understand the risks of investment and to consider your personal views of risk when choosing your pension investments. If you’re unsure about your investment options, seeking professional financial advice could be a good idea. This prevents you from making the wrong investment for you.
4. What options are available to the self-employed for retirement savings?
A personal pension scheme is a common way to save for retirement for the self-employed. They offer low minimum contributions and the flexibility to pay in as and when you can, making them a good option if you have an irregular income.
Another option is group personal pension schemes, involving a group contribution into a pension pot. These are similar to workplace pensions, but they’re set up by a pension provider rather than an employer. If you’re a member of a trade union or professional body, they might offer a group personal pension.
5. I’m in poor health. Can I still contribute to a pension?
Yes, you can still contribute to a pension even in poor health. If you’re unable to work, there may be benefits to continuing with your pension contributions, depending on whether you can afford to do so. The money you pay into your pension continues to benefit from tax relief and can grow over time through interest. It’s also worth noting that your pension pot can usually be passed on to your beneficiaries in a tax-efficient way if you die before taking your benefits, or if you die before the age of 75.