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What Is a Private Pension?
A private pension, also called a personal pension, is a product used to save money for retirement. Personal pensions are ‘defined contribution pensions’. This means the money you receive when you retire is based on the money you pay in and the performance of your investments. The money you pay into a personal pension can be invested in shares, bonds, property and cash.
A private pension is similar to a workplace pension but set up by you rather than your employer. You can pay regular contributions or make one-off payments. Your pension provider will automatically add Income Tax relief up to the basic rate (20%).
Do I Get Tax Relief on My Private Pension?
You get tax relief when you pay into a private pension. Your pension provider will automatically claim the basic rate relief and add it to your pension for you. This tops up your contributions by 25%. For example, if you pay £100 into your pension, the taxman will add another £25. This means that for each £100 you pay your gross contribution will be £125.
Higher or additional rate taxpayers can claim a further 25% and 31% respectively. You claim the additional tax relief through your Self-Assessment Tax Return every year.
For 2020/21 you get Income Tax relief on your pension contributions of up to 100% of your salary, subject to a maximum contribution of £40,000. This maximum assumes your adjusted income is less than £240,000. Special rules and restrictions apply if it’s higher than this.
Do I Need a Private Pension?
Private and workplace pensions offer you a way to save for retirement. Any money you’re able to save will supplement the income you get from the State Pension.
You can have a private pension and a workplace pension at the same time. A workplace pension is more attractive than a personal pension because your employer is required by law to contribute to it. So, if a workplace pension is available to you, you should try to save into it.
If you’ve opted out of your company pension scheme, or you’re self-employed, a private pension is one way you can save for your retirement.