Pensions Academy Lesson 3

Everyone’s ‘ideal’ retirement looks different. Some people dream of travelling the world, some don’t want to stop working entirely. But have you considered how you’ll fund your retirement? It’s not feasible to live on the State Pension alone (more on that later), so you’ll need to look at other ways to pay for the life you want to live after work. Here’s where a personal pension comes in.

A personal pension is a great way to create income for life after work. With things like pension tax relief and compound interest on your side, you could build up a healthy nest egg by setting money aside regularly into a pension. 

 

State pension versus cost of living

A new YouGov retirement report found that 69% of Brits would like to retire before the age of 65 and 65% believe that they’ll rely on the State pension.1 However, most people receive a State Pension at age 66, rising to 68 in 2026 and potentially even higher in the future. Also, the full State Pension is currently £221.20 a week; however, you could receive even less depending on how many years of National Insurance contributions you’ve paid. Learn more about the State Pension.

Think about how much you earn now and how much you spend each year. While you may have reduced some outgoings such as commuting and mortgage costs by the time you reach retirement, £11,502 per year is likely not going to cover all your living expenses.

According to the Pensions and Lifetime Savings Association, a “moderate” standard of living for a single person in retirement is £31,300, so the State Pension alone won’t even give you half of this! If you dream of having some luxuries in retirement, the “comfortable” level of annual income for a single person is £43,100. Wondering how much you need to save each year to get to these magic numbers? We share some tips below and in Lesson 6 – How much should I save for retirement?

 

How personal pensions work

 

A personal pension – also known as a private pension – is a type of pension that you can set up to save for retirement. It’s a good addition to a workplace pension, as well as the State Pension.

A personal pension gives you the most control out of all the different types of pension. You can choose how much you want to contribute to your pot and how frequently you make those deposits. You could make regular contributions such as £100 a month, or one-off deposits if you have some extra cash to save.

You also get to choose your pension provider and where your money will be invested. Depending on the provider, there may be lots of investment choices that require closer attention, or you could opt for ready-made funds, some of which are tailored to investing for retirement. You’ll be able to start taking money out of a personal pension from age 55 (rising to 57 in 2028).

 

Saving vs investing

Saving is generally safer than investing as your money isn’t exposed to the ups and downs of the stock market. However, saving is generally better for short-term financial goals. When it comes to longer term goals, such as retirement, investing into a pension is generally considered to be more suited for growing your money over the long-term (five years or more). While investing can have more risk associated with it than saving, investing returns tend to beat that of cash savings over the long term.

If you were to save for retirement with a savings account, you could be missing out on huge potential growth – even with high-yielding savings accounts. That’s because pensions not only benefit from the growth associated with the stock market, but also from compound interest and benefits such as pension tax relief. 

To demonstrate the differing levels of growth with cash savings vs investing, let’s look at the graph below. It shows the returns of cash vs the returns of investing over a 10-year timeframe from 2013 to 2023. 

The investing returns here are based on our Balanced Starting Option and include all fees. Where available, returns data for the selected funds have been used. Where the fund has a shortened performance history, we have used the appropriate index to simulate performance. Cash returns are based on the best available cash interest rates at the beginning of each year.

 

Graph showing £2,200 shares cost vs £1,167 cash

 

 

Do I need a personal pension if I have a workplace pension?

Already pay into a workplace pension? Great! This means you’re on your way to building up a healthy pension pot. To meet the government’s 8% minimum annual contribution into a workplace pension, you’re normally required to pay in 5% (minimum) of your annual earnings. By doing this, you’ll get a nice 3% top up from your employer. Alternatively, your employer could cover the whole 8% or choose to pay in even more. If a workplace pension is available to you, it’s important to opt in and maximise your contributions first, ensuring you get the free employer contributions – it is free money after all!

However, even with a total of 8% a year going into your retirement pot from your workplace pension, you’ll find there’s still a gap to reach the amount experts recommend you contribute each year. Learn more about the retirement gap below. So if you already have a workplace pension, it may be sensible to consider a personal pension as well. You may find it gives you more flexibility and investment choice, and is a handy way to combine old pension pots.

If you don’t have a workplace pension, perhaps because you’re a freelancer, a personal pension is one of the best ways to save for retirement thanks to pension tax relief – check out more details below.

 

How to close the retirement gap with a personal pension

There are lots of ways a personal pension can help you afford your ideal retirement…

 

Pension tax relief

Firstly, you get pension tax relief i.e. free cash from the government when you add money to your pension! We’ll go into this in more detail in Lesson 5, but as a Basic rate taxpayer, you can think of it as a 25% top up on your contributions. So if you pay in £80, you’ll get an extra £20, giving a total of £100.

Higher-rate taxpayers and additional-rate taxpayers may claim more tax relief through their self-assessment tax return or have it automatically paid through their workplace pension scheme; up to 40% and 45% in total respectively.

 

Make regular contributions, however small

Making regular contributions is also a wise move and the best way to do this is to pay yourself first. This is one of our top saving hacks and the habit here can be more important than the actual amount saved.

Setting aside your personal pension savings immediately after payday will stop you from only saving what is left at the end of the month, which in many cases isn’t the amount you may have hoped for. Try creating a recurring direct debit that pays you by going straight into your personal pension.

You can even save your spare change from your everyday spending and invest it directly into your pension with round ups! These small savings could be a big win for your final retirement pot.

At Moneybox, you can save into a personal pension through weekly deposits, payday boosts and of course with round ups.

 

You can access your pension pot earlier

Finally, don’t forget that like a workplace pension, having a personal pension means you can start to access your money in your 50s, rather than having to wait till your 60s for the State Pension. So, if you want the flexibility to retire early or move to working part-time, a personal pension can help you achieve this.

 

Next up in Lesson 4 – we look at how the stock market affects your pension, plus tips on how you can best protect and grow your pension pot.   

 

As with all investing, the value of your pension can go up and down, and you may get back less than you invest. Tax treatment on your pension contributions depends on individual circumstances and is subject to change. Payments you make into your pension won’t be accessible until the minimum pension age (currently 55, increasing to 57 in 2028).

 

[1] Planning for tomorrow: GB retirement report 2024, YouGov