What’s the difference between a private pension and a workplace pension?

Private vs workplace pension, what's the difference? Can you have both? Your questions answered here.
A river running between two forests | wealthify.com
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For what is essentially just saving for your future, pensions are unnecessarily complicated and confusing. In the UK, workplace pensions are now ‘opt-out’, which means that if you’re an employee, it’s likely that you’ll be automatically enrolled into a workplace pension when you start a new job. Not having a choice in provider may have you wondering if your workplace pension is any good - or even asking if you could have a private and a workplace pension.

If this has crossed your mind, then this breakdown of private pensions vs workplace pensions is for you.

What’s the difference between a private pension and a workplace pension?

In a nutshell, the biggest difference is who sets them up. A workplace pension is set up by your employer with no input by you, whereas a private pension (also known as a ‘personal pension’) is set up by you with no input from your employer.

Both these pensions allow you to save for retirement, and you’ll have some say in how much you can pay in. With a workplace pension, you’ll have a minimum contribution amount of 5% of your salary which is deducted from your paycheck before tax each month. Your employer will also pay into a workplace pension, and by law, their minimum contribution amount is 3% - this makes your total monthly contribution at least 8% of your salary.

If you’ve opted out of a workplace pension, then you won’t get this additional contribution from your employer.

Can I have a workplace and a personal pension?

Yes, you can absolutely have a workplace and personal pension.

In fact, you could use your workplace pension to help top up the state pension, and then use a personal pension for added flexibility when saving for your future. When you understand how each pension works, it can be much easier to figure out how to use them together or know which one is best for you, if you only want one.

What type of workplace pensions are there?

There are lots of pension providers (and each of them may invest your money slightly differently), but typically, there are three types of pension schemes:

  • Defined contribution pension– the most common pension type, where your pension is determined by how much you and your employer put in and how the investments performed.
  • Defined benefit pension– where your retirement benefits are based on your earnings and how long you’ve been a member of the scheme
  • Cash balance plans – these are a mixture of defined contribution and benefit schemes.

The type of pension scheme you’re enrolled in will depend on your employer, as defined benefit and cash balance plans often aren’t available through private pensions. 

How do private pensions work?

Private pensions work similarly to a defined contribution workplace pension. This means that you’ll get out what you put in, plus tax-relief and any investment gains.

One of the key differences between workplace pensions and personal pensions is tax relief. With a workplace pension, your contribution is taken before tax which can reduce the overall tax you pay on your salary.

However, with a personal pension, your contributions typically happen after tax.

To make up for this – and to encourage you to save for the future – the government give you tax relief for paying into a private pension. At Wealthify, we’ll automatically claim this at the basic rate and add it to your personal pension immediately, meaning there’s no need to deal with HMRC.

This tax top-up works out as 25% more on any contributions you make. So, if you pay £100 into your pension, another £25 will be added, making the total amount added to your pension £125. If you’re a higher or an additional rate taxpayer, then you’ll be able to claim a further 25% or 31% (respectively) through your Self-Assessment tax returns.

What are the other benefits of personal pensions?

Aside from the tax relief, there’s plenty of other reasons why you may think about opening a private pension. For a start, they can offer greater flexibility when it comes to payments. This can be helpful if you have an irregular income or if any big expenses pop up and you can’t afford to pay as much into your pension that month.

Another pull for many people is that you have a say in how your money is invested. So, for example, you could choose to have an ethically invested pension (where you only invest in companies that are committed to doing good) or have control over how much risk your investments take. Often, these aren’t options that are available to you with a workplace pension.

Perhaps the biggest benefit of personal pensions is that it doesn’t change if you move jobs as it isn’t related to your employer. And, to make it even better, you could even transfer your old workplace pensions into your personal pension so that you don’t lose track of them!

When can I access the money in my pension?

Another difference between personal and workplace pensions is how old you need to be to take money from your pension.

With a workplace pension, this limit often changes but normally sits between 60 and 65, with a few offering early drawdown from 55. Personal pensions, on the other hand, will generally allow you to draw from your pension as soon as you turn 55 (from 2028 this will increase to 57).

It’s worth pointing out that just because you can start drawing from your pension earlier, it doesn’t mean you need to. Most pensions – workplace or personal – will allow you to continue paying into them until you’re 75, provided that you haven’t started taking from your pension yet.

Who should have a personal pension or workplace pension?

Everyone in the UK who is over 22 and has a job earning more than £10,000 a year should have at least one workplace pension. Because a personal pension is something that you have to do yourself, fewer people are likely to have one.

If you’re planning for your retirement and want to have a little bit more control over your future, then a personal pension could be exactly what you need. And, if you want one with added flexibility and plenty of control, then you might want to check out Wealthify’s Private Pension.

You can start investing in the future with just £50 and have five different investment styles to find one that best suits you. And, if you want to invest ethically, then there’s an option for that too!

 

 

With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.

Your tax treatment will depend on your individual circumstances and it may be subject to change in the future.

 

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