Understanding personal pensions
Last updated on 10 February 2016
Personal pensions are a way to save for retirement. They are tax-efficient, but watch out for charges which can make a big dent in your savings
What are personal pensions?
Personal pensions are a way to save for retirement. You may be enrolled in a personal pension through your workplace - in that case, it is usually called a group personal pension scheme (GPPS). You can also arrange them for yourself, direct with an insurance company or other provider.
All personal pensions are defined contribution schemes (also called money purchase schemes). This means you build up your own pension pot and the amount of pension you eventually get depends on:
- the amount paid in
- how well the invested contributions grow
- the amount taken in charges
- your choices about how you use your savings.
You get tax relief on the amount you pay into a personal pension and your savings build up largely tax free. Once you have reached age 55, you can draw out some or all of your savings at any time as cash lump sums, income or a combination of both. For more information about your options, see our guide on ways to use your pension pot.
You can take out a quarter of your savings as tax-free cash. The rest, whether drawn as income or lump sums, is taxable.
How your savings are invested
Normally, you decide how your savings are invested. For plans taken out (either through your workplace or direct) with an insurance company, personal pensions can typically be invested in a range of different investment funds.
If you want an even wider choice and are happy making your own investment decisions, consider a self-invested personal pension (SIPP). These are offered by a few insurance companies but also by stockbrokers and other specialist firms. With a SIPP, typically you can invest in most investment funds, shares, bonds and some types of commercial property.
The impact of charges
Check carefully what charges you have to pay. For example, there might be an administration charge each time you pay money in and charges if you want to switch between investment funds or transfer your savings to another provider.
With each investment fund there may be an up-front charge when you first invest (though these are becoming less common) plus annual deductions (often called ‘ongoing charges’) that are a set percentage each year of the amount you have invested.
Where the personal pension is your workplace scheme, usually the charges must not total more than 0.75% a year of the value of your pension pot.
Depending on the type of personal pension you have, there may be other charges too. If you invest direct in shares and bonds, there will be dealing charges to pay each time you buy and sell. If you manage your pension investments through an online service, there may be a regular charge for this called a ‘platform charge’. If you take financial advice, you pay separately for this.
How much pension will you get?
The earliest age at which you can start your pension is 55. But the pension you would get from such an early age is likely to be relatively low.
Each year you will receive a statement showing how much your pension pot is worth and how much pension it might provide from your chosen pension age.