Private Pensions and you Household Budget

Private or personal pension is the amount contributed to your pension pot, which is over and above the state pension.

Private Pension in Detail

Both you and your employer can contribute towards private pension. You can purchase private pension from pension companies, insurance companies, major commercial banks, and building societies. Some examples of private pension service providers include Virgin Money, Standard Life, Hargreaves Lansdown, and Fidelity. Contribution towards private pension can be invested in all types of assets like stocks, bonds, commercial property, among others.

Types of private pension

Standard pension: This type of pension is arranged either by you or your employer. You need to make regular monthly payments to the pension organization.

Example 1:

Aviva offers more than 250 pension plans with different investment options such as cash/money market, property, equities, UK gilts, and high yield or corporate or global bonds. Minimum monthly payments start from £200. If you make an initial one-off contribution of £10,000 your monthly contribution can be only £20.

Stakeholder pension: This type of private pension has to meet certain criteria set by the government. For example, the government has set limits on management charges of stakeholder pension. Customers can switch providers whenever they want without any extra charges. These types of funds also have to meet security guidelines, such as appointing independent trustees and advisors. Stakeholder pension contributions can start from as little as £20 per month with an option of weekly or monthly payments.

Example 2:

Standard Life stakeholder has a low annual charge of only 1 percent of the amount you will invest every year. So if you invest £1,000 in a year you will have to pay £10 as charges. You can choose from its range of 30 investment funds. The funds are placed in three different risk groups: Cautious, which is the least risky and offers the lowest return; Balanced, which is riskier and provides a greater return in comparison to Cautious; and Opportunity, which is the riskiest and has a maximum growth potential. The minimum payment is £20 per year, and maximum is £3,600 per year.

SIPPs (Self-invested personal pensions): Under this type of pension, you can choose where your money is invested. You have greater control as compared to standard or stakeholder pensions. However, this method is risky and is suitable only for people with investment knowledge.

Example 3:

AJ Bell Youinvest's SIPP plan provides the choice of investing in a range of UK and Irish securities, investment funds, and international securities in 21 stock exchanges. You can also invest in different types of bonds like government and corporate bonds. Investment options also include warrants, exchange-traded funds (ETFs) and exchange-traded commodities (ETCs). Charges per deal are in the range of £4.95 to £9.95. There is no minimum threshold for a monthly contribution.

Private pension as part of the household budget

Private pension contribution reduces your income, but it can be of great benefit after retirement as usually the state pension is not sufficient. Also, you get tax benefits on your private pension contributions. Thanks to the tax benefits, if you invest £800, your pension pot gets credited with £1,000. You can choose the type of private pension based on your investment knowledge, your risk appetite and your long-term financial objectives.

Use our household budget calculator to see how contributions to private pension affect your household finances.