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What is the difference between a state pension and a personal pension?

If you want to take control of your retirement, it’s important to understand how state and personal pensions work.
Plants growing in the sun | Wealthify
Reading time: 5 mins

Understanding how pensions work is key when it comes to preparing for retirement. In the UK there are several types of pensions available each coming with different sets of rules.

And if you want to make the most of your later life, it’s worth having a look to familiarise yourself with each type. Here’s how state and personal pensions work.

What is the state pension?

Put simply, the state pension is a regular payment you should receive from the UK government once you reach retirement age. How much you get depends on you having paid a certain level of national insurance contributions over your working life.

To receive any state pension at all during retirement, you’ll need at least 10 years’ worth of contributions; if you fail to save for long enough, you may not receive any money from the government. The state pension isn’t limitless and there’s a maximum amount you can get.

As things currently stand, you can receive up to £10,600 a year, but to get the full amount, you’ll need at least 35 years’ worth of contributions.1 

If you don’t know how much you’ve got saved already, you could always contact HMRC and check with them.

Similarly, if you’re worried about not having enough years of contribution to claim the full state pension, don’t hesitate to get in touch with HMRC – they’ll tell you how many years you’ve got to catch up and whether you’re eligible to pay voluntary contributions.

If you’re employed in the UK and earn over £183 a week2, the whole process is automatic and your company will be paying national insurance contributions out of your salary – these will vary depending on how much you earn.

If you’re self-employed, you’ll need to arrange the payments yourself as nobody else will do it for you.

The money you’ve got saved in your state pension will not be paid to you before you reach pension age, also known as State Retirement Age. This is the earliest age you’ll be allowed to receive your state pension and typically, it’s worked out based on your date of birth and gender.

But as a rule of thumb, you can expect it to be set in your late 60s. Two months before you reach your pension age, you’ll receive a letter telling you everything you need to do to claim your state pension. If the letter doesn’t arrive, then you may need to contact HMRC.

Here are some useful links to keep track of your state pension:

Check your national insurance record: https://www.gov.uk/check-national-insurance-record
Check your pension age: https://www.gov.uk/state-pension-age
Contact HMRC: https://www.gov.uk/contact-pension-service

What is a personal pension?

A personal pension is a type of pension designed to give you more control and flexibility over your retirement savings.

Unlike the state pension, where contributions are determined based on your pay, with a personal pension, or SIPP (Self-Invested Personal Pension), you get to choose how much you put in your pot and for each contribution you make, you’ll receive 20% tax relief from the government – sounds good, right? So, if you’re a basic rate taxpayer and decide to put £800 in a personal pension, you can expect the government to add £200 to your pot, which would bring your pension to £1,000 in total.

Now, if you do the maths, you’ll notice that £200 is 25% of £800, meaning you’re effectively getting a 25% top-up on each contribution you make.

Obviously (and unsurprisingly) personal pensions come with many rules and if you want to take control of your retirement, you may want to be aware of them.

Firstly, although you can put as much as you want in your personal pension, the amount you get tax relief on is limited to £60,000 a year (or 100% of your earnings, whichever is lower) – this is your pension annual allowance and it includes contributions made by you and the government.

Secondly, everything you put in your personal pension is locked away until your 55th birthday. This means you’ll only be able to enjoy your savings at the age of 55, so before you open a pension, make sure you’re comfortable leaving your money alone for years or even decades.

Now, the way you withdraw your funds will depend on the type of pension you’ve got. If you have a defined benefit pension, you should get an income that will gradually increase throughout the years. On the other hand, if you have a defined contributions scheme, then you’ll be able to decide how you want to move your pension into drawdown.

You could either take your whole pension in one go as a lump sum, withdraw money as you need it, or get paid a regular income based on your pot size and growth.

Whatever drawdown method you pick, the first 25% you’ll take out are tax-free.

What pension is right for me?

Most people who live and work in the UK will have a state pension, which is a great thing as it ensures you get money in later life. But in many cases, only receiving a state pension may not be enough to cover your expenses and pay for your new lifestyle.

If you’re employed, you should be enrolled into a workplace pension where you and your employer make contributions every month – it’s always a good idea to keep track of this as it will help boost your retirement income.

And if you’ve got multiple workplace pensions floating around, make sure you know where they are and how they’re performing.

Now having a state pension plus one or several workplace pensions can help your future self live comfortably. But if you’re in a good position and want more control and flexibility, there’s no harm in looking into personal pensions – at the end of the day, it’s all up to you.

Opening a personal pension can sound like a big job, but it doesn’t need to be.

We live in exciting digital times where everything can be done online thanks to robo-investing platforms, like Wealthify. Not only is it easy to take the plunge but you can open a personal pension with just £50. Simply let us know how much you want to invest, select your investment style, and decide if you want to go ethical.

We’ll do the rest, from building and managing your pension to ensuring you get your 25% top-up.

Whether you’re at the beginning, middle, or end of your pension journey, our pension calculator can help you understand what your finances could be like in retirement.


1: https://www.gov.uk/new-state-pension/what-youll-get

2: https://www.gov.uk/new-state-pension/your-national-insurance-record-and-your-state-pension

The tax treatment depends on your individual circumstances and may be subject to change in the future.

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

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