Best Private Personal Pensions Compared

Private pensions explained

A private personal pension is an account that the individual sets up themselves – or with the help of an adviser – into which they pay regular contributions, The contributions are invested across different asset classes such as stocks and bonds.

The key benefit of saving into a pension is tax relief. Contributions receive 25% tax relief for those on the basic rate and they are free from inheritance tax if you start accessing your pot before you reach age 75. You can also take 35% of your pension tax free once you reach age 55, but you cannot draw before this point, or you’ll pay hefty penalties.

For most people, relying solely on the basic State pension will not provide a suitable standard of living in retirement. Supplementing your retirement income with a private personal pension can mean the difference between just surviving and really living.

Typically, private personal pensions are defined contribution arrangements (sometimes called money purchase), which means the account holder bears all the investment risk. The size of the final pot depends on what you paid in and how well the investments performed.

Private personal pensions differ from workplace pensions set up by an employer into which they will also contribute.

Are private pensions tax efficient?

Yes, private personal pensions are arguably the most tax-efficient way to save in the UK.

When you pay into a personal pension from your net pay, the Government automatically adds 25% as a top-up for basic rate tax relief.

If you’re a higher or additional rate taxpayer, you may benefit from even more tax relief. In addition, any returns made on the investments in your pension are free from capital gains tax.

How private personal pensions work

The market for private pensions is huge, and with so much choice, finding the right plan can be confusing. It is worth considering taking independent advice to find the most appropriate pension for you.

Who offers private personal pensions?

There are plenty of well-known companies offering good value private pensions . These include Nutmeg, PensionBee and moneyfarm. Some will offer access to a wide range of ways to invest, while others will keep it more basic. Typically, these firms charge around 0.5% of your pot to run the plan. They offer access to tracker funds which deliver returns in line with how the main indexes are performing your contributions are spread across bonds, stocks, commodities and property. They will also diversify across geographies providing access to global markets.

You can also invest into a self-invested personal pension (SIPP), which allows you to choose exactly how your money is invested.

You will pay the provider to manage and administer your fund, and fees vary [see fees section].

How do I pay into my private personal pension?

Payments will be made from your bank, and you can opt to increase – or decrease – contributions when you need to, if minimum payment levels are not breached.

Anyone can open and pay into a private pension, and you can also pay into other people’s plans. Your employer can also pay into your personal pensions, but they do not have to. They are only obliged to offer and contribute to a workplace pension scheme.

Most private pension plans can be opened online. Providers will ask you to complete a form and the plan can be open within minutes. You will need to think about how much you can afford to pay in – some providers will ask for minimum payments – and decide on the amount of investment risk you want to take.

How do I access my private personal pension pot?

As soon as you reach age 55 (rising to 57 in 2028), you can access private personal pension savings.  The rules allow you to take 25% tax-free and the remaining 75% is taxed at your marginal tax rate. There’s also generally no inheritance tax payable on a personal pension unless it’s first accessed over the age of 75.

The amount in your retirement pot will depend on your contributions and how well the market has performed.

There is a lot of flexibility about how you take the money out of your pension, but what you can do will vary depending on your provider.

Private pensions can be taken as a lump sum or remain invested, allowing you to draw what you want when you want (this is known as income drawdown). Income drawdown costs vary and can include Set-up/ administration fees, charges for the withdrawal of a tax-free lump sum and then fees for each additional withdrawal, as well as ongoing management charges.

PensionBee offers flexible drawdown and does not charge you fees unless you decide to make a full withdrawal of your pension within one year of your first transfer. If your pot has been with them for less than a year and you wish to withdraw it in full, they charge a fee of £480.

Hargreaves Lansdown also offers drawdown with no set up fee and does not charge if you aren’t withdrawing or you are holding cash. The yearly charge for holding investments is 0.45%

It is no longer compulsory to buy an annuity, but they are an option if you want a guaranteed income for life.

What are the Private Pension Annual allowances?

The Government sets limits on how much you can pay into your pension, there is an annual alliance, lifetime and money purchase allowance.

Annual allowance

The annual allowance is the limit of how much you can contribute to your pension each year and still receive tax relief. This is currently set at £40,000 a year.

Lifetime allowance

There is also a lifetime allowance, currently set at £1.0731 million. After this level, a lifetime allowance charge is applied at 25% if the pot is retained to pay benefits. If the member takes the pension as a lump sum, they will pay 55% on the amount that exceeds the lifetime allowance.

Money purchase allowance

If you take more than your tax-free cash from your pension through flexible retirement income or as a lump sum, you may only receive tax relief on contributions to your pension pots of up to £4,000 a year, instead of the normal £40,000 annual allowance. This is known as the Money Purchase Annual Allowance.

Can you nominate someone to get your pension when you die?

Yes, pensions are flexible on death, which means you can nominate a recipient to receive your retirement income.

If you die before your 75th birthday and haven’t started drawing your pension, it can be passed to your beneficiaries tax-free. The beneficiaries will be able to choose how they draw the income (lump sum, drawdown or annuity).

If you die before your 75th birthday, and are already receiving your pension, it will impact how beneficiaries can access the pot. If you took a lump sum and you have remaining cash in your bank account outside of your pension, this will be counted as part of your estate. If you are using drawdown, your beneficiaries can access whatever’s left in your pension entirely tax-free.

If you die after your 75th birthday, your beneficiaries will pay income tax on any pensions you leave behind, at their marginal rate.

How is a private personal pension different from the State pension?

What is the difference between the State pension and a private pension?

The State pension is paid by the Government to all those with at least 10 years of National Insurance Contributions. A private pension is entirely separate from the State pension and consists of contributions you have made.

How much does the State pension pay?

To receive the maximum State pension amount – currently £179.60 per week (2021/22) or £9,339.20 per year, you need to have 35 ‘qualifying’ years.

Couples entitled to the full state pension receive a maximum of £359.20 per week or £18,678.40 per year as of 2021/22.

Why should l consider a private pension if I am entitled to a State pension?

Given the relatively low level of income from the State pension, those who also save into a private pension will most likely be far better off. In addition, you can draw from your private pension from age 55, but the State pension is only available from age 66 (rising to 67 from 2028). There is also a lot of flexibility available with private pensions, giving you the chance to grow your money (however, investments can fall as well as rise).

How to Choose the Best Private Personal Pension

Given the number of private pensions available, it is always worth considering working with an IFA or wealth manager to help find the best product.

Where to look

There are numerous provider guides and comparison sites available online. The goodmoneyguide has one here: https://goodmoneyguide.com/personal-pensions/

What to look for

Always look for regulated providers that are part of the Financial Services Compensation Scheme, which offers 100% protection should the pension company fail. In addition, if you’ve received bad advice in relation to your pension, you could be eligible to claim up to £85,000.

Watch out for providers – or advisers – that contact via cold calls (which are now illegal) or unsolicited marketing material. Always take the advice of a fully regulated independent financial adviser. Always check the list of regulated and approved list of providers on the Financial Conduct Authority’s website: https://www.fca.org.uk/firms/financial-services-register

The amount of fund options available are important; look for providers offering options that meet your risk appetite.  If you are interested in a self-invested personal pension, which allows more freedom to invest in individual stocks, make sure the provider has the appropriate expertise and range suited to your preferred portfolio.

Make sure you ask about minimum contribution levels and that you understand fees and charges.  Many firms will charge exit fees if you want to transfer to a new provide, which can often be expensive (see fees section).

Fees and Charges for Private Personal Pensions

Fees and charges vary considerably between providers. Moneyfarm charges 0.35% while Nutmeg’s fee is 0.75%, but the services and fund choices will also vary between providers.

It is important to remember that low fees do not necessarily mean best value. Paying lower fees for poor performance may prove a false economy, but excessive fees can decimate a pension fund. For example, assuming a pension pot value of £50,000 growing at 5% a year, reducing your charges from a high level of 1.2% to a very reasonable 0.4% could save you £23,000 over 20 years. Make sure you explore precisely what is included in the costs and what impact these have on the likely final pension pot.

Some providers charge for setting your pension up, but this is not a universal charge, so it makes sense to shop around.

Other charges include platform fees, which cover the administration of your pension. They’re usually charged as a percentage of the money you’ve saved.

There is also an ongoing charges figure (OCF), which covers the day-to-day costs of running an investment fund. It’s usually charged as a percentage of the value of your investments.

Annual Management Charge

The annual management charge (AMC) pays for running and administering your plan, and for investing contributions.

The AMC is charged as a set amount or as a percentage of the value of your pension investments.

Each investment tends to have a different annual management charge to reflect the type of investment fund. Some are more specialist or are more actively managed, and they often have higher charges.

An annual charge above 1% is generally considered expensive for a basic personal pension. For fully managed SIPPs with significant fund charges and financial advice included, fees can often exceed 1%.

Exit Penalties & Fees

It is likely that you will pay an exit fee if you want to transfer your pension to a new provider. These vary from company to company – and even between products within the same provider – and can be as much as 10%, which might negate any benefit of leaving.

You may also incur an early exit fee to cover the long-term management and handling charges over the life of the pension.

Exit fees and penalties are not always clear, so it is important that you read the small print before making any decisions.

How to Transfer a Private Personal Pension

If you feel that you are paying too much in fees to your current private pension provider, or they do not offer the flexibility and fund choices you need, it might be worth transferring. However, not all schemes accept transfers.

What should I think about before transferring?

It is almost always better to remain in your occupational or workplace pension because you enjoy contributions from your employer. However, if you are in a defined benefit pension and approaching retirement, you will not be able to take the same flexibilities as those offered to DC members. You must seek financial advice before switching out of DB, and remember that you will be giving up protection of an income for life. Even if your employer is vulnerable to insolvency, your DB pension is protected by the Pension Protection Fund; something not extended to DC funds.

If you are a member of several workplace DC pensions, it might make sense to consolidate these in one place, since your scheme is not transferred automatically when you change jobs.

It may also make sense to transfer your pension to a specialist provider if you are moving overseas. Not all schemes can take contributions from abroad, so you need to fund a qualifying recognised overseas pension scheme.

How to start transferring an employer pension into a private pension

You can usually transfer a defined benefit pension to a new pension scheme at any time up to one year before the date of when you’re expected to start taking your pension. Some schemes will let you transfer only a part of your benefits. You’ll need to check with your provider to see if they offer this option.

If you are considering leaving your DB scheme, before you can start the advice process, you need to get a transfer value from your scheme. The transfer value is set for three months, so line up an adviser ahead of time to avoid having to make rushed decisions. If you don’t complete the transfer process within the three-month period for which the transfer value is guaranteed, you might have to apply for another value, which will likely incur a cost.

When you’ve transferred to a new scheme, you’ll usually have given up all benefits under the old scheme, and when you start taking your pension, you can’t usually move your pension elsewhere.

Why do I need an IFA to help with a transfer?

If you take regulated financial advice, the IFA bears the risk of any poor decisions rather than you.

Defined benefit scheme members must seek regulated independent financial advice before taking a transfer out if their pot is worth more than £30,000. Thousands of DB members have received bad advice, resulting in them losing their valuable DB pensions. The FCA says good advisers will ask you about current financial circumstances and aims; priorities and spending plans in retirement; other pensions, assets and debts; and your health and your family’s health.

As with DB members, if your DC scheme has ‘safeguarded benefits’ such as a guaranteed annuity rate, and the value of these benefits is more than £30,000, you’ll have to get regulated financial advice before you can transfer.

If you have small pension pots worth less than £10,000, consider keeping them where they are. This is because if you’re considering taking a small pot lump sum at some point before you retire, by withdrawing the whole amount, this will not affect any future pension contributions.

Is it worth getting a private pension if you are self-employed?

While employers are obliged to offer all employees a workplace pension, the self-employed need to set a private pension up themselves. There are a growing number of providers offering products aimed at the self-employed market, which offer the flexibility individuals need when they work for themselves.

The rules allow you to contribute your entire annual income up to £40,000 per year, and this will be matched by tax relief of 25%.

Basic private pensions offer limited investment choice, so it may be worth considering a SIPP, which offer far more options if you are self-employed. However, SIPPs require a level of commitment and expertise, and this must be considered before taking out a plan.

Can You Save into a Lifetime ISA & a Private Pension?

Individuals aged over 18 and under 40 can consider opening a LISA, which is a savings account designed solely to buy a first home or to provide a retirement income.

You can invest in a private pension and a Lifetime ISA (LISA) simultaneously.

LISAs are tax-advantaged, so you won’t pay tax, capital gains, or dividend tax on money you take out, but contributions are made after income tax, and they are subject to inheritance tax.

LISAs are also restricted to a maximum £4,000 a year contribution limit, which goes towards the £20,000 ISA contribution cap. You can only withdraw once you reach 60 or if the money is to purchase a first property. Unauthorised withdrawals are subject to a 20% charge.

What about Self-Invested Personal Pensions?

A SIPP is a type of personal defined contribution pension that allows the member to choose where to invest their contributions. Unlike in a traditional personal pension where investments are limited to those offered by a pension provider, a SIPP might offer access to a broad range of asst classes, including stocks, bonds, commodities, commercial property, private equity, and even fine wines or classic cars. The range of assets offered will vary between providers.

A SIPP provider administers the SIPP on the member’s behalf. They provide access to a range of funds, take the contributions, and ultimately pay out the pension. The provider charges for this service and fees vary between companies.

There are low-cost SIPPs and full SIPPS.

Low-cost SIPPs

The low-cost SIPP (also known as SIPP lite or DIY SIPP) typically charges lower fees than a full SIPP. This is because it is ‘execution-only’, which means that the provider offers a platform for you to choose and manage your investments, with generally fewer investment choices and often no investment advice.

Low-cost SIPPs offer fewer asset classes than their full cost counterpart and typically include listed equities, Exchange Traded Funds (ETFs) and bonds, but not unlisted equity or commercial property. Some may just offer a limited number of readymade funds. Providers do not offer advice, leaving the investor to make their choices on their own.

Full-SIPPs

Full SIPPs offer the widest range of investment choices, including unlisted stocks and commercial property. Depending on the provider, you may also have access to an investment adviser with a full SIPP. The advice – and the broader investment options – mean that full SIPP fees are generally higher than lite SIPPs.

When thinking about what to include in your SIPP, remember that you will need to maintain and manage your portfolio, so your financial circumstances and expectations are important. Think about your level of investment experience, financial knowledge and confidence. Consider whether the provider offers a smaller fixed range of investments or a wider, more flexible portfolio.

There are comparison sites available online, but it may be worth taking advice before choosing a provider.

Who Holds Your Money in a Private Pension?

When you invest in a private pension, an administrator is responsible for any payments into your pension. They will also reclaim basic rate tax relief and process any income withdrawals that you make.

SIPP providers such as Hargreaves Lansdown, AJ Bell and PensionBee administer pensions as part of the service. Other providers use third party administrators to manage this function on their behalf, for example Barclays SIPP uses AJ Bell.

Third-party administrators also usually take care of workplace pensions on behalf of employers.

All third-party administrators (and the administration of SIPP providers if done in-house) are regulated by the Financial Conduct Authority which expects firms to clearly establish roles and responsibilities and have procedures to ensure all employees are properly trained and competent.

If you have concerns or complaints about the way your pension is administered, you need to contact the Pensions Ombudsman.

Should the administrator fail completely your pension will be protected by the Financial Services Compensation Scheme.

What are considered private pensions?

Private pensions are usually one of three types:

Personal Pensions

Personal pensions – offered by major pension providers offering access to a range of asset classes, which are invested on the member’s behalf once they have chosen their funds.

Charges vary between providers, as do contribution levels.

Stakeholder Pensions

Stakeholder pensions – these have low and flexible minimum contributions, and charges are capped at 1.5% a year of the value of your pension pot in the first ten years, then 1% a year. Stakeholder pensions offer a default investment strategy, which take away the need to make investment decisions.

Self-invested personal pension (SIPP)

Self-invested personal pension (SIPP) – SIPPs operate like a standard personal pension but offer more flexibility with the investments. They are generally more expensive than their other private pension counterparts, and you need to understand how investments work, research where to put your money, and spend time managing your portfolio.

Do I have any private pensions?

The Government has a pension tracing service, which can help you track down any lost pensions by post and online https://www.gov.uk/find-pension-contact-details

You can also use the Government’s Unclaimed Assets register, which can also locate misplaced savings and investments. It costs £25, and more information can be found here: https://www.uar.co.uk/

How much should I have in my pension by the time I retire?

As a rule, adviser  of your current income when you retire. Furthermore, they suggest that you need 20 – 25 times your retirement expenses. So, if you spend £30,000 per year, you’ll need £600,000 – £750,000 in pensions, investments and savings.

It is worth deciding how your lifestyle will likely change when you retire and the expectations you have from life after work. For example, will you spend more on travel and holidays but less on commuting? Will you stay in your current house or downsize? What about the cost of healthcare as you age?

A financial adviser should help you devise a timeline that can help manage your expenses, which in turn helps you to decide when to take lump sums, how much to drawdown, and when or if you want to buy an annuity.