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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
Reading time: 5 mins

For what is essentially just a way to save for your future, pensions are unnecessarily complicated and confusing. For example, why are there multiple types? What even is the difference between the State Pension and a personal pension?

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. But although this makes things easy, not having a choice in provider might have you wondering if yours is any good – or even asking if you could have a private and a workplace pension.

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

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

In a nutshell, the term 'private pensions' covers both workplace pensions and personal pensions (also referred to as 'SIPPs'). Basically, these are pensions where your contributions are invested in different assets – like stocks and bonds – to give your money an opportunity to grow.

But what is the difference between a workplace pension and a personal pension?

It's all in who actually sets them up for you. A workplace pension is set up by your employer (with no input by you), whereas a personal pension is set up by you (with no input from your employer).

Both these pensions allow you to save for your retirement, and you’ll have some say in how much you can pay into them.

With a workplace pension, you’ll have a minimum contribution amount of 5% of your salary, and this is deducted from your paycheck before tax each month. Your employer will also pay into a workplace pension for you, and by law, their minimum contribution amount is 3%. This makes the 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 your State Pension (which is funded by the Government – check if you're eligible here), and then use a personal pension for added flexibility when saving for your future. This is because, unlike a workplace pension, you can pay into a personal one as and when it suits you – for example, when you have some extra cash.

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. This is because defined benefit and cash balance plans often aren’t available through personal pensions. 

How do private pensions work?

As we've established, both workplace pensions and personal pensions are considered types of 'private pensions', and there are some differences between them.

A personal pension works similarly to a defined contribution workplace pension in that you’ll get out what you put in, plus tax-relief and any investment gains you make along the way. But one of the key differences between workplace pensions and personal pensions is the 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 will typically get paid in after you've been taxed.

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

Visit the GOV.UK website to find out more about tax on private pension contributions.

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 personal pension. For a start, they can offer greater flexibility when it comes to payments as you don't need to put a set amount in each month. In fact, there may be months when you don't pay anything into your personal pension at all. 

This may be helpful if you have an irregular income or 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'll have a say in how your money is invested. So, for example, you could choose to have an ethically invested pension (where you avoid certain industries and only invest in companies that are committed to having a positive impact), or have control over how much risk you take when it comes to what you invest in. Often, these options aren't available to you with a workplace pension.

Perhaps the biggest benefit of personal pensions is that it doesn’t change when 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 thing you're probably wondering about personal and workplace pensions is how old you have to be to withdraw money from them.

With most workplace pension schemes, this limit often changes but normally sits between 60 and 65, with a few offering early drawdown from age 55. Personal pensions, on the other hand, will generally allow you to draw money from your pension as soon as you turn 55 (from 6th April 2028, this age will increase to 57 instead).

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 per 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 a great option to consider. 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 your future with just £50, and you'll have five different investment styles to choose from based on your appetite for risk. And, if you want to invest ethically, then there’s an option for that too!

With investing, your capital is at risk. 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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