How Personal Pensions Work

The basic idea behind personal pensions is fairly simply.  You pay in money throughout your working life.  This is invested by your pension provider (or by you directly in the case of self-invested personal pensions) and when you retire the investment returns are used to provide you with an income.  The reason investing through a pension fund can be more attractive than just investing directly in the stock market is that it generally offers some form of tax benefit.

Up until April 2015, savers had to use most of their pension fund to buy an annuity.  An annuity is basically a guaranteed income for the rest of a person’s life.  Annuities provide security, but this security came at a price.  Since April 2015, savers have had a far greater range of options for using their pension pot to fund their retirement.  They are also now able to leave their pension fund as part of their estate.

These “pension freedoms” offer a lot more flexibility.  This can be a huge bonus to people who could be looking at decades of retirement and, hence, the possibility that their needs (financial and otherwise) will vary greatly over its course.  With great flexibility, however, comes great responsibility.  In other words, savers will need to make sure to inform themselves and/or get professional advice, so that they can make the right decisions.

As a final point, personal pensions are separate from workplace pensions, however, employers can contribute to them if they wish.  If for whatever reason, you are unable or unwilling to participate in the auto-enrolment scheme (or do not qualify for it), then you could try asking your employer if they would contribute to a personal pension instead.  They do not have to do this, but they might agree to do so voluntarily.

​Contact us to discuss your options.