Private pensions

Private pensions are pensions set up on a personal basis with a pension provider that an individual policy holder contributes into. Private pensions are held on a defined contribution basis in that the end value they pay out in retirement is determined by the total contributions made into the pension.

Any contributions into private pensions are grossed up to your relevant tax threshold amount and may be made up to the higher of £3,600 and your relevant UK earnings. This can be demonstrated by the example of a lower rate taxpayer wishing to contribute £80 into their private pensions which will then be grossed up via tax relief by the Government to the tune of £100 (20%).

Higher and upper rate tax payers’ contributions to private pensions may receive tax relief up to an additional 30% however this is dependent on the amount that they earn on a sliding scale. Contributions over the annual allowance into private pensions of £50,000 per year however do not receive tax relief and as such are subject to tax at your relevant tax threshold.

These contributions into your private pensions can be made as either lump sum or regular contributions for as long as you wish, which if you wish to build up a significant fund until retirement will normally be throughout your working life. As private pensions are designed to pay out in your retirement and provide you with an income when you are no longer able to continue working, the Government suggest that all UK residents should have private pensions. Many people overestimate the amount that is provided by the State pension and as such don’t have enough income to sufficiently support their retirement.

As it stands today, an individual may take the benefits from their private pensions by age 55 which, if this is before their expected retirement date, is known as pension release.

Pension release allows you to take up to 25% of the value of your private pensions as tax free cash with the residual amount being used to provide an income or reinvested back into other private pensions so that they may continue to grow until you require an income.

Note: Releasing your pension benefits early could reduce your income at retirement and therefore is only suitable for a limited number of people and circumstances.  The above is based on our understanding of current legislation and tax rules and are subject to change by the government. Tax reliefs referred to are those currently applying. Please note the value of investments can go down in value as well as up and you may get back less than you invest.