What is a Private Pension?

Pensions are a type of saving wrapper that can hold multiple investments which allow individuals to save up a fund and then to draw an income from upon their retirement. The Government recommend that individuals begin saving in a pension as soon as they are able due to their importance for retirement and the tax advantage they provide. This article will discuss about the benefits of a private pension.

Private Pension: How it Works

Contributions an individual makes into their private pension arrangement receive tax relief on the amount up to the relevant tax level that the individual pays. In effect, a basic rate tax payer would receive 20% tax relief on any contribution they make into their private pension (whether private pension or occupational pension), an example of this would be:

Susan invests £80 into her private pension arrangement on which she receives 20% tax relief from the Government which takes the total contribution into her pension up to £100.

Contributions into your private pension may be made at intervals that are best suited to your needs and circumstances such as monthly, yearly or even lump sum but limits do apply on the amount that may receive tax relief. Only the higher of £3,600 or up to 100% of relevant UK earnings may receive tax relief on the contributions (limits apply) while any amount over this into the private pension will be subject to tax.

An estimated £27 billion shortfall exists in today’s market between what people should be saving and what people are actually saving in their private pension funds, usually because they overestimate how much the State Pension provides upon retirement. This shortfall has resulted in the average private pension income a UK adult retiring in 2008 to be £18,663 while average income for a working adult is roughly £5,000 more than that amount.

The Government have due to this attempted to combat the shortfall in pension savings through a strong push to inform people about the importance of pension saving while encouraging individuals to open up their own employer or private pension arrangement.

Private Pension

Private pension schemes are pension schemes set up by people wishing to have more direct control over their pension rather than opening one up with their employer. By doing so they may also receive better rates and a wider spread of investments to choose from.

Many types of private pension schemes exists which allow individuals to set up arrangements providing them with a choice of differing funds, charges and companies to hold the schemes with. Different types of private pension such as SIPPs or SASS which allow specialist investments to be held may also be opened up as a private pension.

Most private pension arrangements for individuals are usually held under large insurance companies such as Scottish Life and AEGON which hold large funds with many investors; but should you desire you may invest in smaller, higher risk companies if they meet your goals and circumstances.

It is recommended that should you desire to set up a private pension then you could contact a qualified financial adviser to help you choose the best funds for you and your circumstances.