A private pension can offer a range of benefits to your existing portfolio and in this article, we will explore the pros and cons of holding a private pension – be it an occupational pension or a provision provided by a private entity, it pays to have a diverse and well-adjusted pensions portfolio.
What is a Private Pension?
Planning for your retirement is a major concern for many as they approach the end of their working lives but for many, the specific benefits and range of pension arrangements can be confusing.
With that in mind, a private pension provision can be described as any arrangement that includes any pension benefit that is not provided by the state.
Whilst it is common to hold a state pension, a private pension provision is specifically defined as any registered pension scheme that is registered with HM Revenue & Customs that can benefit from certain tax reliefs and exemptions with the scheme aiming to provide benefits and payments upon retirement, ill-health and death.
Underpinning this is the notion that both employers and individuals are encouraged to contribute to a pension scheme so that when people begin to move towards retirement, they’ll have private pension income in addition to their State Pension and so will be less likely to rely on the State in retirement.
Tax Relief for Your Pension Provision
The amount of contributions paid into a pension arrangement will of course vary but are generally eligible for tax relief. Much of the investment growth isn’t taxed but pension income paid out on taking benefits is taxable.
The withdrawal of funds and tax liabilities thereafter is referred to as EET (exempt-exempt-taxed) – contributions are exempt from tax on the way in, funds are exempt from tax while invested but pension income is taxed when cashed out.
The term ‘registered pension scheme’ however has a different meaning depending on the type of scheme held. Here are some examples:
- Occupational Scheme: An occupational pension scheme from an employer will be considered a registered pension scheme in its own right.
- Personal Pension Policies: A personal pension policy, be it an individual policy or as a part of a group personal pension scheme, will be considered part of a pension provider’s registered pension scheme.
- Other Policies: Retirement annuities, individual buyouts and trustee proposed buyouts are also registered pension schemes in their own right.
Please Note: For those that pay higher or additional rates of tax or whose pensions contributions are not paid through salary sacrifice, you will need to claim an additional or higher rate tax relief through your self assessment tax return.
Every registered scheme will need a designated administrator or trustee(s).
For occupational pension schemes the administrator is normally considered to be the trustee(s), whereas with regards personal pension schemes, the scheme administrator is normally the pension provider.
An administrator’s duties include registering a scheme with HMRC, dealing with payment of tax to HMRC, providing information to HMRC and providing information to scheme members.