6 Questions to Ask Yourself Before Opening a Private Pension

A private pension schemes differ from a workplace pension, which eligible UK employees are automatically enrolled in once they earn a certain amount, and a State Pension, which is government money you receive when you reach State Pension age. 

If you are considering opening a private pension, here are six questions to ask yourself.

1. Do I understand the tax benefits and annual limits?

If you pay into a private pension, the government can add a top-up payment called tax relief to anything you personally contribute, up until you reach the age of 75. You get tax relief on any amount you personally contribute into your pension as long as you don't pay in more than you earn and all payments are less than the annual allowance of £60,000 or 100% of your income (whichever of those is lower). 

Most pension providers will claim tax relief automatically for you at a fixed rate of 20%. If you are a higher-rate or additional-rate taxpayer, you can claim extra tax relief by contacting HMRC or completing a Self Assessment tax return.

2. What fees are associated with private pensions?

Private pensions come with a range of fees, which can vary depending on your pension provider and whether it's a standard personal pension or a self-invested personal pension (SIPP). Here are some of the most common charges you might face:

Annual management charge (AMC). This is an annual percentage of your pension pot, which covers the cost of running the pension and managing investments.

Ongoing charges figure (OCF). If you invest in funds, these are the costs of the fund manager buying or selling assets and operating the fund. This fee can either be included within the AMC or charged separately.

Trading fees. With a SIPP, you are charged - per trade - when you buy or sell shares, ETFs, or bonds.

Exit fees. If you transfer your pension pot to another provider or consolidate your schemes, you might have to pay an exit fee.

Inactivity or small-pot fees. Some pension providers charge a fee if your pot is below a certain amount or if you stop contributing for a while.

3. What are my investment options?

With a private pension, you can choose where your money is invested. However, what you can invest your money in depends on the type of private pension you have.

If you have a SIPP, your choice is much broader than where a workplace or State Pension chooses to invest on your behalf. You can choose a SIPP where an investment team manages your pension for you, or opt to manage the investments yourself with a DIY style provider. Some of the investments you could include:

• Individual company shares (UK or overseas).
• Mutual funds.
• Ethically focused funds.
• Government bonds (gilts) and corporate bonds.
• Commercial property funds.
• Real Estate Investment Trusts (REITs).
• Alternative investments like gold or other commodities.

4. Am I comfortable with investment risks?

With all the control over your investments, you must ask yourself if you are comfortable with the investment risk. Invested money can both increase and decrease in value over time, depending on how your chosen investments are performing. 

That said, all pension pots are investing your money on your behalf, and it’s a typical strategy for growing your retirement wealth. It may be worth leaving it to the professionals to handle the investing side of things if you’re unsure.

5. Do I need the help of a professional?

When it comes to pensions, it’s often recommended to seek professional advice from an independent financial adviser. These professionals can help you navigate complex pension rules, choose the best investment opportunities, and avoid costly mistakes.

6. When can I access the money in my pension pot?

To plan for your golden years, you'll want to know when you can access the money you have been saving. Most private pensions set an age when you can start taking money from your pot, which is most likely after the age of 55 (57 from 2028). 

Contact your pension provider if you're not sure when you can take your pension.

Are You Going To Open A Private Pension?

Private pensions are an excellent way to boost your retirement funds, and you can open one alongside your workplace pension, ensuring you benefit from both government tax relief and employer contributions. Consider the questions above to prepare for fees, investment options, annual limits, and tax benefits.