Explain private pensions to me like I’m five

[LastTwoBraincellsFightingFor3rdPlace]

I’m asking off the back of another thread. I’m in my late 20s and I want to prepare for retirement as best as I can. I don’t believe the state pension will exist when I’m in my 60s/70s.

How do private pensions work, exactly? Can you withdraw from them at any age?

Thank you, in advance.

A pension is just a tax-efficient way of saving for retirement. You save the tax you would have paid if you had taken the money as cash - so if you pay your top rate of tax at 20%, if you put £80 in from your net pay, they add £20 for the tax you paid, so you get £100 in in total.

When you take it out, you can take 25% of it tax free (up to a limit, but it’s quite a high limit of over £250k).

Because of these tax advantages, there are some restrictions on when you can take it. The rules at the moment are that you can only take from 10 years before state pension age. It’s 55 that’s the earliest you can take it now, rising to 57 in 2028

The Moneyhelper website is good on basics https://www.moneyhelper.org.uk/en/pensions-and-retirement/pensions-basics

Thank you! Are private pensions the same as SIPPs?

SIPPs tend to have more investment choices. On the money helper link above if you scroll down a bit there’s a link for Personal Pension Plans and the one after on SIPPs which explains the key differences.

but in terms of tax efficiency and when you can take them they are the same

Does your employer offer a pension? They are the best ones to prioritise as your employer often pays in as well.

@Ginmonkeyagain I have a workplace pension, but I’m not working now due to ill health. I don’t know if it’s possible to pay my workplace pension since I’m no longer working?

I already have a S&S ISA btw.

Have you got a LISA at all?

The rebel donnegans have a free online course called rebel finance school. This teaches you all about the best way to save/invest for retirement.
Very eye opening.

If not then that is worth a thought too.

It's a tax free savings ISA but the government put 25% in as well.

Have a look at the link.

You'd be able to access it earlier than the state pension age.

www.gov.uk/lifetime-isa

@summerlovingvibes I do, I have one with Moneybox from when I purchased my house!

Employers now have to offer an occupational scheme where they contribute a minimum of 3% and the employee contributes a minimum of 5% of salary (there are some exceptions to this, but they're pretty narrow).

So if you opt out of this scheme, you're also denying yourself 3% 'free' savings.

Furthermore, if your employer offers the scheme as a salary sacrifice, you will be saving the NI that you would have suffered on the pension contributions.

If you're a higher rate tax payer (and not in a salary sacrifice scheme), you can reclaim the difference in the tax benefit you're due (so 40/45% minus the 20% deemed tax credit you will already receive).

At some point in my life I read that you should aim to pay in half your age as the percentage to your pension (so at 40, you should be investing 20% etc). I think the idea is to keep it at that level once you start saving, but I've adjusted it throughout my working life to always pay half my age as my pension contributions. These contributions INCLUDE your employer contribution.

Ooh amazing thread
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