Pensions Academy Lesson 3

Everyone dreams of finishing work and putting their feet up in retirement. But have you considered how you will pay for it? The State Pension probably isn’t going to cut it (we’ll tell you why below), so you’ll need to look at other ways to fund the life you want to live after work. Here’s where a personal pension comes in.

A personal pension is a great way to build up a healthy pension pot. By starting early and squirrelling away some of your money, which then gets a nice government top up, you could build up a healthy nest egg to help you afford your perfect 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).


State pension versus cost of living ⚖️

Most people receive a State Pension at age 66, although this will rise to 68 over the next few decades and potentially go even higher in the future. The full State Pension is currently £185.15 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, on the other hand, you may be planning to fill your golden years with holidays and eating out. Either way, it may be hard to imagine living on £10,000 a year.

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 7 – How much should I save for retirement?


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).