What is a Private Pension and is it safe?

What is a Private Pension? | December 2023

In the UK, a private pension is a way of saving for retirement and is set up by an individual or a company, rather than the government.

Read this article to understand the types of private pensions and their role in helping to save for retirement. Specifically, for those who are self-employed or have an irregular income.

Table of Contents

1. Understanding Private Pensions

Private pensions are long-term investments, with different types offering unique benefits. You contribute money into a pension pot which is then invested to grow your savings. 

One of the key benefits is the tax relief which you receive on your contributions, making it a tax-efficient way of saving. The amount you receive from your private pension in retirement is dependent upon various factors. These include the type of pension, the money paid in , and the performance of the investments.

A private pension plan can be especially beneficial for self-employed individuals. Unlike employees with the option of workplace schemes, the self-employed need to take responsibility for their retirement savings. 

That’s where private pensions come in, offering a flexible and tax-efficient way of saving.

It’s also worth noting that you can have more than one pension pot, particularly useful if you change jobs frequently or if you want to diversify your investments. Having multiple pension pots is perfectly legal and can provide an effective way to plan for retirement, diversifying your investments and helping manage risk.

2. Types of Private Pensions in the UK

There are several types of private pension plans to choose from in the UK. When it comes to retirement planning, choosing the best private pension scheme for your individual circumstances can be daunting. 

Whilst other pensions are available, the following types of pensions are the most commonly chosen in the UK.

Defined contribution pension

A defined contribution pension is a popular choice. Here, you and possibly your employer choose how much to contribute to your pension pot. The amount you get when you retire is based on how much is contributed and how well the investments perform.

Stakeholder pension

Another option is the group stakeholder pension, a type of defined contribution pension that some employers offer. 

With this pension, your employer chooses the pension provider but you can decide how much you want to contribute. Both the defined contribution and group stakeholder pensions offer tax advantages, offering the option to take a tax-free lump sum at retirement.

Personal Pension

If you’re self-employed, you might consider a personal pension as your best option. Here, you make regular contributions to a pension provider who invests the money on your behalf. Depending on your income, these schemes offer the flexibility to make regular payments or lump sums.  

Similar to the defined contribution pension, the amount received when you retire is based on how much you’ve paid in and how well the investments have performed.  

Final salary pension

Finally, there’s the final salary pension, a defined benefit pension, or workplace pension. Employers usually provide these, offering a guaranteed income on retirement through their own contribution. 

This is based on your salary and how long you’ve worked for the company. 

Group Personal Pension

Some employers set up group personal pensions for their employees, offering pension relief after retirement that you share with other members of the workplace. However, it is important to note that this is often also set up by community providers or pension providers.

3. The Role of Private Pensions in Retirement Planning

Planning for retirement can seem daunting, but private pensions play a crucial role in securing your future after employment. They provide a regular income in retirement which supplements the state pension. 

Starting a private pension early can significantly affect your retirement income. The sooner you start, the more time your money has to grow. Even when starting small, regular contributions can add up over time, thanks to the power of compound interest.

Private pensions also give you flexibility. You can usually take a tax-free lump sum from your pension pot when you reach retirement age. Alternatively, the rest can be used to provide a regular income through an annuity or income drawdown.

However, it’s crucial to remember that investing in a pension involves risk. The value of your pension pot can go down as well as up depending on the economy, just like other investments. It’s essential to regularly review your pension arrangements and consider seeking financial advice, ensuring that your pension is on track to meet your retirement goals.

private pension

4. How to Start a Private Pension

Starting a private pension is a straightforward process. First, you must decide which type of private pension is right for you. This will depend on your financial circumstances, employment status, and retirement goals. For example, depending on whether you have other forms of income or property investments you can cash in after retirement, it may be worth considering investing more into a private pension for when you don’t have the security of employment.

Next, you need to choose a pension provider. This could be in the form of a bank, an insurance company, or through an independent financial advisor. It’s important to compare different providers to find the best deal. Make sure to consider factors like annual management charges, the range of investment options, and the provider’s reputation.

Once you’ve chosen a provider, you can set up your pension, deciding how much you want to contribute and how often. Remember, the more you contribute to your pension, the more money you’ll likely have in retirement.

Finally, you’ll need to decide where to invest your pension contributions. Most pension providers offer a range of investment funds to choose from. Therefore, your best choice will depend on your attitude to risk, investment goals, and retirement timeline.

"One of the key benefits of private pensions is the tax relief you get on your contributions, the government effectively giving you the money you would have paid in income tax on your pension contributions."

5. Investment Strategies in Private Pensions

Investing your pension contributions can help grow your pension plan for retirement . However, investing involves risk and it’s important to have a strategy in place. This will depend on your risk tolerance and your investment timeline.

A more aggressive investment strategy might be suitable for those with a longer timeline until retirement. This could involve investing in higher-risk assets like stocks and shares. Although these can offer higher returns, they are also more volatile. Therefore, the value of your pension pot could go down in value.

You might want to switch to a more conservative investment strategy as you get closer to retirement, potentially investing in lower-risk assets like bonds and cash. Whilst these offer lower returns, they are also less likely to decrease in value. This is important to consider if you’re working in a shorter time frame.

Diversification is also an important part of any investment strategy, referring to the spreading of your investments across different types of assets and sectors to help reduce risk. If one investment performs poorly, others might perform well and help to offset losses.

However, it’s important to remember that investing is complex, and it’s always a good idea to seek financial advice. A financial advisor can help you to understand your investment options, creating a suitable strategy and helping you choose the correct investments to make.

private pension uk

6. Tax Implications of Private Pensions

One of the key benefits of private pensions is the tax relief you get on your contributions, the government effectively giving you the money you would have paid in income tax on your pension contributions. This can make private pensions a very tax-efficient way to save for retirement, rather than other methods of investing.

When you retire, you can take 25% of your pension pot as a tax-free lump sum. The rest is taxed as income. However, how much tax you pay varies depending on the size of your pension pot and other income.

It’s also important to remember that there are limits to how much you can contribute to your pension each year and still receive tax relief. This is known as the annual allowance, and currently stands at £60,000, or 100% of your qualifying earnings (whichever is lower) in the UK. If you contribute more than this, you could face a tax charge.

7. The Risk and Reward Balance in Private Pensions

Investing in a private pension involves balancing risk and reward. The potential for higher returns comes with greater risk. Therefore, understanding this balance and considering how much risk you’re willing to take is essential.

The value of your pension pot can go down, as well as up. If your investments perform well, you could have more money than you put in, decreasing the amount if they perform poorly. Over the long term, investing in a pension can provide a higher return than saving in a bank account. However, it is dependent on the performance of the underlying investments.

It’s also worth considering the risk of not saving enough for retirement. Without a private pension, your retirement depends on the state pension. Alternatively, for many, the state pension is unlikely to provide enough income to maintain your current lifestyle in retirement.

Managing risk involves diversifying your investments, whilst also regularly reviewing your pension arrangements. Furthermore, it’s a good idea to consider seeking financial advice for where to invest, and for other pensions that may help your personal situation.

private pension advice

8. Transferring Your Private Pension

You might consider transferring old pensions into a single pension pot if you have old ones from previous jobs, making it easier to manage your pensions and keep track of your retirement savings.

However, transferring a pension should not be taken lightly. Some pensions, particularly final salary pensions, offer benefits that could be lost if you transfer. This is why it’s important to seek financial advice from a professional before making a decision.

There are also benefits to keeping your pensions separate. For instance, if you have pensions with different providers, you might benefit from a wider range of investment options. This works to spread the risk if one of these investments failed.

9. The Impact of Legislation on Private Pensions

Legislation can have a significant impact on private pensions. Changes include the introduction of auto-enrolment and pension freedoms.

From 2012, auto-enrolment has been a government initiative which requires employers to enrol their eligible workers into a workplace pension scheme automatically. Employees can opt out, yet auto-enrolment has greatly increased the number of people saving for retirement.

If you’re auto-enrolled, you, your employer, and the government contribute to your pension pot. This can be a tax-efficient way to save for retirement, specifically if your employer matches your contributions. 

The pension freedoms, introduced in 2015, give people more flexibility in how they access their pension savings. From age 55, you can now take your entire pension pot as a lump sum, buy an annuity, or use income drawdown to provide a regular income.

However, it’s important to keep up to date with changes in legislation as there may be future changes in the law that affect how much you can contribute to your pension, access your pension savings, and how your pension is taxed.

10. Comparing Private Pensions and State Pensions

Private pensions and state pensions are two key elements of retirement planning, the state pension providing a foundation for your retirement income supplied by the government. This will depend on your annual spendings and income. However, for many people, more is needed to maintain their current lifestyle in retirement.

Private pensions offer a way to supplement the state pension, saving for retirement in a tax-efficient manner. They also offer more flexibility than the state pension as you can choose when to start taking your private pension, although this is usually between 55 and 75. Furthermore, you can choose how to take your pension as a lump sum, an annuity, or income drawdown.

However, private pensions come with their own risks and costs, similar to any investments. This is why understanding these and considering how they fit into your overall retirement planning is important. It’s always advisable to seek financial advice when planning for retirement, ensuring the investments are going to the right places.

what is a private pension

11. The Importance of Private Pension Advice

Seeking private pension advice can be beneficial, especially when setting up a private pension. A financial adviser can help you to understand your options by assessing your attitude to risk, and creating a retirement plan which aligns with your goals.

However, it’s important to remember that financial advice comes at a cost. Make sure to carefully weigh up the cost of the advice against the potential benefits of investmenting more. It could be worth it if it helps you make the right decisions and potentially boost your pension income.

It’s also worth noting that your employer may offer access to financial advice if you have a workplace pension. This can be a valuable resource, helping you to understand how your pension works and working to maximise your pension wealth without the personal cost for the service.

12. How Private Pensions Work With Other Assets

Private pensions are just one part of your overall wealth. They work alongside other assets including property, savings, and investments to provide income in retirement.

One of the key benefits of private pensions is their tax efficiency, the money you contribute to your private pension being entitled to tax relief. Plus, you can usually take a tax-free lump sum when you retire.

However, private pensions are not the only tax-efficient way to save for retirement. ISAs also offer tax advantages and a high interest rate, and property investment can provide a steady income and potential capital growth. It is necessary to consider these additional investments, as well as your pension to ensure financial security in retirement.

private pension scheme

13. Private Pensions and Inheritance Tax

Private pensions can play an important role in inheritance tax planning. Unlike other assets, the money in your pension pot is usually not included in your estate for inheritance tax purposes.

If you die before the age of 75, your pension pot can be passed on tax-free. Alternatively, if you die after age 75, the person who inherits your pension will pay income tax on any money they withdraw.

However, it’s important to remember that pensions and inheritance tax rules can be complex. Therefore, it’s always a good idea to seek financial advice when planning your estate to understand your personal situation.


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.

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William Jackson

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Review of Article

This article has been reviewed by Saq Hussain, who is a pension and financial expert, with over 25 years experience of the financial services industry. Saq has regualrly featured in the UK press commentating on financial and specifically pension and retirement related issues.