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Private Pensions and the Conditions You Should Be Aware Of

By: Tracy Wilkinson - Updated: 4 Oct 2012 | comments*Discuss
Private Pensions Personal Pensions

Private pension schemes were introduced in the late 1980's to allow people who didn't qualify for a company pension the opportunity to invest into their future. The idea was that by giving such workers a moveable plan designed along the same lines as money purchase schemes, it would protect workers who were not eligible to benefit from a company pension from an uncertain future.

The terms surrounding private pensions were updated in 2001, and since then certain individuals who meet the eligibility criteria can invest in a personal pension plan, even if they are already a member of a company pension scheme.

Pension Value

Because this type of pension is not managed by an employer, then your final pension value will depend on a number of factors, which include how much you have paid into the fund, how long you have paid it for, and the performance of any fund that pension contributions are invested into. Fund management charges will also need to be paid out before the actual financial value of the pension can be ascertained.


Any contributions that you make into a personal pension scheme will attract tax relief, meaning essentially whenever you make a payment, the value of that payment will increase, courtesy of the Inland Revenue. You can work out how much that means to you in real terms by using your current tax rate - if you're on the basic taxable rate and you pay £78 into your pension fund, then the tax relief afforded to your payment will see your fund swell by £100. If you're on a higher salary and attract a 40% tax rate then to see your pension £100 better off, will only cost you £60.

Depending on your age there is a limit on how much you can invest into a personal pension - which is currently set at between 17% and 40% of your annual earnings. When you retire you can take a tax-free lump sum of up to 25% but the remainder must be put towards buying an annuity, which will provide your pension payments for the duration of your retirement.

Why Choose a Personal Pension?

There are benefits with personal pensions, namely the level of flexibility you get with them – if you participate in such a plan you can keep it and move it with you to any employer in the country. You may also be able to take ‘career breaks’ if, for example, you want to leave your job to have and raise a child. Look ahead and make sure that your pension scheme will be appropriate in relation to any life choices you intend to make. You don’t get the relative security you get with a company scheme, nor will you benefit from employer contributions, but it really depends on what your circumstances are and what you want out of the plan.

Independent Advice

If you choose to take out a private pension, you must make sure that you do your research so you can choose the right scheme for you, and just as importantly, go with a good, reputable pension provider. One of the best things you can do is to find a good independent financial advisor, preferably someone recommended by a friend or colleague, and ask them to help you make sense of the various complex options available to you.

They should be able to find you a plan that doesn’t have high charges to pay for setting up your pension, and give you a detailed illustration of what you are likely to get back after certain periods of time, which after two years should be at least what you’ve paid in. They should also be able to tell you what percentage of your contributions you will be charged by your pension fund manager in the way of charges. Try and keep these down as low as possible because it is all coming out of your contributions and going into their pocket.

What to Look For in a Personal Pension

When you're thinking of setting up a pension plan, look out for plans that:

  • Give you flexibility
  • Take career breaks into account
  • Give you the option to retire without any financial penalties
  • Let you change your contributions/stop altogether without penalty

Keep an Eye on Your Investments.

Your pension fund manager will call the shots on where your money is invested. This is why it’s so important to choose a good, reputable pension provider. Even so, shares can go up and down so it’s well worth keeping your eye on the ball and checking how your fund is doing once or twice a year and moving your investments around a little if you’re not happy with the performance.

Changing Schemes

If you want to change your pension plan, you must find out first what kind of charges you are going to have to pay. High charges to your fund manager, such as those incurred by setting up and changing your plan can seriously drain your pension and depending on how long it has been running, can make it hard for you to get anything back when you change.

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