A personal pension is a type of defined-contribution pension. You choose the provider and make arrangements for your contributions to be paid. If you haven't got a workplace pension, getting a personal pension could be a good way of saving for retirement.
Use a pension calculator
With the pension calculator on the Money Advice Service's website, you can estimate the amount of income you could get when you retire. This is worked out from the level of regular contributions that you choose to pay into your pension pot. Just enter the amount of the contributions and it will work out what your pension pot could be worth if it grows at certain rates each year.
The figures you see in the pension calculator are estimates - they are not guaranteed. The actual retirement income you receive will be affected by future changes in things like interest rates, inflation and investment growth.
Your pension provider will claim tax relief at the basic rate and add it to your pension pot. If you're a higher rate taxpayer, you'll need to claim the additional rebate through your tax return. You also choose where you want your contributions to be invested from a range of funds offered by your provider.
How they work
Your pension pot builds in line with the contributions you make, investment returns and tax relief. It helps to think of defined-contribution pensions as having two stages.
Stage 1 – While you are working
The fund is usually invested in stocks and shares, along with other investments, with the aim of growing the fund over the years before you retire. You can usually choose from a range of funds to invest in. Remember that the value of investments may go up or down.
If you need help with deciding how to invest your contributions, see the Investment choices planner on the Pensions Advisory Service website.
Stage 2 – When you retire
bear in mind
You can't touch the money you invest in a pension until your retirement.
The size of your pension pot when you retire will depend on:
- How much you pay into your pension pot
- How long you save for
- How much, if anything, your employer pays in
- How well your investments have performed
- What charges have been taken out of your fund by your pension provider
Following changes introduced in April 2015 you now have more choice and flexibility than ever before over how and when you can take money from your pension pot. Take your time to understand your options - see the Pension Wise website.
Personal pensions at work
A personal pension may be offered through your employer. These are called group personal pensions. To find out more about this type of pension, see the Pensions Advisory Service website.
If you change jobs, check when your new employer will enrol you into a workplace pension scheme. You can continue paying into an existing personal pension, but you may find you'll be better off joining your employer's workplace pension scheme, especially if the employer contributes. Compare the benefits available through your employer's scheme with your personal pension.
If you decide to stop paying into a personal pension, you can leave the pension pot to carry on growing, but check to see if there are extra charges for doing this.