How to start a private pension (the easy way)

Your sunset years may seem far off, but we promise, the earlier you start saving for them, the more you’ll thank yourself later. So, how do you get started? With a private pension – it’s hands down the best way to save for retirement.

By the way, we’ll run through how to get started first (as we know you’re keen!), and cover all the details below later – so you can get fully clued up if you’d like to learn more.

There’s just one key thing to know first – a private pension that you set up yourself is actually called a personal pension (it’s a type of private pension, alongside a workplace pension, which is what your employer sets up for you).

How to start a private pension

Luckily, starting a personal pension has never been easier. A whole host of awesome pension services have sprung up to reinvent the world of pensions and make it super easy for people like you and us to save for our sunset years. Hooray!

Here’s all you have to do.

1. Pick a private pension provider 

First things first, you’ll need to choose a private pension provider. They’ll manage everything for you, and invest your money safely and securely so it grows over time. Providers can vary over the service they offer and the fees they charge.

Don’t worry if that all sounds complicated. We’ve picked out the best pension providers for you.

2. Pick a pension plan

When you sign up with your new pension provider, they’ll ask you what type of plan you want.

Your plan is how your money is invested – and this is typically in the form of an investment fund. That’s a group of lots of different investments all pooled together into a single investment, and managed by expert investors, who specialise in growing pensions over time.

Your plan is often based on your age and how many years away from retirement you are – the older you are, the less risk you might want to take with your money, as you’ll want to be using it soon. However, you can typically pick any plan you prefer (or even make your own investments within a self-invested personal pension).

With modern pension providers, you’ll also have the option for your money to only be invested ethically and socially responsible – so no harm to the environment or local communities. We’re big fans of these. Why not have your pension help the world rather than harm it?!

As a recap, one of the best options to set up a pension is PensionBee¹, it’s easy to use, low cost and offers an ethical investment plan.

3. Get started!

Now all you need to do is simply sign up through their website or mobile app if they have one, and start paying money in – it’s best to start with a one-off payment, and then set up regular payments (such as monthly), so your pension pot can really start growing.

Some pension providers will ask you to put in a minimum payment each month. But the really great thing about personal pensions (compared with workplace pensions) is that they’re much more flexible. You can pay in whatever you want, whenever you want.

In other words, if you want to just pay in a little bit every now and again, that’s fine. Or, if you want to set up a regular payment for as little as £5 per month, that’s fine too. The more you add, the more you’ll have to live off when you’re older, but it’s important not to overstretch yourself now either. Ultimately, it’s all up to you!

Prefer things old school?

We love mobile apps and websites that make setting up and controlling your pension easy (and even fun!). But we get that not everyone’s the same, and you might prefer things a bit more old-school.

If that sounds like you, another way of starting a pension is to speak to a financial advisor. These are professionals who can help you find a pension provider and set your pension up for you, either in-person or over the phone – and all based on your individual circumstances.

Just be aware that financial advisors can be expensive as they’ll normally add their own fees on top, and will often have pension plans with more expensive fees too. That said, if you’re still keen to get financial advice, just use Unbiased¹ to find the right financial advisor for you.

What actually is a pension?

First things first, you might be wondering what a pension actually is. It’s basically a savings pot that you (ideally!) pay into regularly throughout your working life. You can then access those pension savings when you hit a certain age, to help tide you over during retirement. 

There are 3 main types of pensions:

1. A personal pension
2. A workplace pension
3. The State Pension

What’s a private pension?

A private pension is often used as a term for a personal pension, but a workplace pension is also a type of private pension too.

A private pension is simply a pension that’s all in your name, and you make contributions to it from your income (rather than getting a set pension from the Government). It’s the most tax efficient way to save for your retirement.

This means you decide how big it could get, and you decide where and who your pension is saved with (except from your current workplace pension), and when to take it (as long as you’re over 55 years old).

1. Personal pension

A personal pension is one that you set up yourself. It’s what you’ll need if you’re self-employed, but it’s also a great idea if you’re employed too – you can save tax-free (just like a workplace pension).

You’ll get a massive 25% bonus on all of your contributions, which is refunding the tax you’ve paid on your income. And, if you’re a higher rate taxpayer (earning over £50,270, and paying 40% tax), or additional rate taxpayer (earning over £125,140, and paying 45% tax), you can claim some of that back too (which is done on a Self Assessment tax return).

A personal pension is pretty great overall, as you get to decide where and who looks after and grows your money – which can have a big difference on your total pension pot when it comes to retirement.

You can pick one that's easy to use, has low fees and a great track record. We recommend PensionBee¹, they’re all three!

You can also move your pensions to a new provider whenever you like, and transfer any old workplace pensions you might have (called consolidating your pension).

Self-invested personal pensions (SIPP)

You could also choose to manage your pension yourself, rather than letting the experts handle things. This is called a self-invested personal pension, or SIPP.

You’ll still get the 25% government bonus on your contributions, the difference is that you’ll be making the investment decisions. We only recommend this for experienced investors.

If this sounds interesting, here’s the best SIPP providers. AJ Bell¹ tops the list, it’s low cost and has a huge range of investment options.

2. Workplace pension

A workplace pension scheme is a pension that your employer sets up for you. You contribute a percentage of your earnings each month (at least 5%), and your employer then tops that up themselves (they have to add at least 3% from their own pocket). Not bad!

Unfortunately, you can’t pick and choose which pension provider you want to use, you can only use the one set up by your employer – some of which aren’t the best.

Nuts About Money tip: it’s a good idea to make the most of your workplace pension by paying in 5% to get the free 3% employer contributions (and more if they offer it). You could then consider using a personal pension to top up your pension pot further after that (rather than paying more into your workplace pension) – you then get to choose where and how your money is invested, and could benefit from lower fees.

3. The State Pension

The State Pension is a weekly payment you can get from the government when you reach a certain age, currently 66.

At the moment, the full State Pension is £203.85 a week. It may not sound like much, but the good thing is that you can get it on top of your private pension (your workplace and personal pensions). So it’s a nice extra!

Bringing them together

You can have as many personal pensions as you like, and you’ll get a new workplace pension with each new job. And, you can receive money from them all on top of your State Pension too. 

All three options together can build up to a large pension pot over time, and a comfortable retirement – the key really is to get saving early!

And not to scare you, but you’ll likely need a hefty pension pot by the time you retire, as much as £958,120 for a comfortable retirement income of £37,300 per year. Learn more about how much you might need with our guide to how much you’ll need in your pension pot.

So, if you’re not thinking about starting a pension yet, why not?!

If you’re ready to get started right away – check out our best pension providers. Spoiler: PensionBee¹ tops the list. It’s easy to use, has low fees and a great track record.

Types of pensions

Let’s get technical for just one minute, when we’re talking about pensions, we mean defined contribution pension schemes, which are pension plans where you have control over your contributions, investment options and how to take the money when you retire.

There’s also defined benefit schemes, which are less common and only offered by a few employers, such as the NHS. And they pay a set amount of money every year when you retire. You can’t open these yourself.

Anyway, let’s dive into the good stuff.

Why is it good to start a private pension?

You don’t need to start a personal pension. There are no laws telling you to. But trust us, it’s a really good idea to have one – even if you already have a workplace pension and you qualify for the State Pension. Here are the main reasons why.

1. Boost your retirement income in old age

First things first, the State Pension is not that much. It’s a nice extra to have on top of other pensions, but if you had to live on just £203.85 per week, you’d probably struggle. 

By starting a personal pension, you can set goals for how much you want to be able to live off when you're older, and then make sure that you’re saving enough to be able to maintain your lifestyle in your sunset years.

It just gives you that control and flexibility you need to make sure your pension pot is working for you. We promise, you’ll thank yourself later!

2. Get the best deal

Second, even though workplace pensions are great, you can maximise your retirement income when you’re older by getting a personal pension as well. Why? 

Well, your employer will set your workplace pension up for you. While that has its plus side, it does mean you’re probably not going to end up on the best-performing pension scheme or the one with the cheapest fees. 

Lots of employers just take the easy route and use the National Employment Savings Trust (Nest) pension scheme, which was set up by the government. 

Don’t get us wrong, it’s absolutely fine. But when you put your money in a pension, it gets invested by experts who know how to make your money into more money.

The Nest pension scheme and lots of other workplace pension schemes are typically quite low-performing which means your money probably won’t grow very much or very fast. 

On the other hand, if you start a personal pension, you can take your pick from all the pension providers out there (pension providers are the guys that give out pensions). 

That means you can choose the best-performing provider with the cheapest fees, meaning your pension savings should increase way more than they would with just a regular savings account. Awesome!

3. Get tax benefits

Now for some really good news. Any money you put into your personal pension will come with a lovely government bonus because of this amazing thing called tax relief.

Let us explain. To reward you for saving up for retirement, the government won’t charge you tax on any money you put into your pension.

That means any tax they take out of your earnings will be refunded straight back into your pension pot, boosting your pension savings. Kerching! They call this ‘tax relief’.

If you’re a basic-rate taxpayer (meaning you earn less than £50,270 per tax year), you’ll get 20% tax relief. (A tax year runs from April 6th to April 5th the following year.)

That means if you pay £80 into your pension pot, the government will add in £20 to turn it into £100. 

If you’re a higher-rate taxpayer (or additional-rate), earning over £50,270 per year, the bonus you get from the government will be even higher – you’ll get 40% or 45%, depending on how much tax you are paying.

What this means is that starting a pension is a brilliant way of reducing your tax bill now as well as saving for later in life.

Your pension savings are also completely tax-free as they grow. There’s no Capital Gains Tax, Income Tax or Dividend Tax to pay on investments within your pension pot. That means your money can grow a lot faster.

4. Control & flexibly 

With a workplace pension, you’ll need to pay a minimum of 5% of your salary into your pension pot every month. But the great thing about a personal pension is that you can pay as much or as little into it as you fancy. There are no rules!

Well, there are a few rules. You can’t pay in more than your total annual income, or more than £60,000 per year (in total across all your private pension pots). If you do, you’ll have to pay more tax.

Anyway, back to the details. Don’t fancy setting up a monthly payment? No problem! You can just pay in a little bit every now and again when you have some spare cash.

Want to pay into your pension regularly but don’t have much cash to spare? Fine! Why not just pay in £10 per month? Sure, it’s probably not going to give you much to live on when you retire, but it’s better than nothing and you can always up your contributions once you start earning a bit more money. 

Of course, if you have a pension pot that you don’t feel like paying into anymore, that’s not an issue either. Even if you don’t pay anything more in, your money should still keep growing as it continues to be invested. Nice!

And, if you do have lots of different pensions with loads of previous employers, you can merge them all into one personal pension, called consolidating your pension, and have a clearer view of how much you have, and more control over where your money is being invested. Plus, you might benefit from cheaper fees having more money in one pension pot.

5. If you’re self-employed

Now, we keep saying how starting a pension is a good idea for everybody, but it’s especially important if you’re self-employed. Why? Well, if you’re self-employed, you won’t have an employer to set up a workplace pension for you! 

That means unless you set up a personal pension yourself, you’ll be left relying on just the State Pension in your old age. Remember, that £203.85 per week we told you about? Of course, that’s assuming you qualify for the State Pension, which not everybody does. More on that in a bit!

Anyway, setting up a personal pension is the best way of making sure you’re preparing yourself for retirement. It can be tempting to think you’ll be able to keep working forever, especially if you run your own business and you love what you do. But the truth is, it’s impossible to know what’s going to happen in your old age, and it’s best to be prepared for every eventuality.

Even if you do keep working long past retirement age, you can still take income from your private pensions (currently you can start taking money from your private pensions from the ripe old age of 55, although it’s rising to 57 from 2028). So, if nothing else, look at it as a treat you can look forward to when you’re older!

When should you start a pension?

Now! We mean it… no matter how young you are, you should start a pension as early as possible. Trust us, the earlier you start, the easier it will be to save up a decent amount for when you retire.

This is because of two main things…

1. Small contributions add up.

If you start saving with only a few years to go before retirement, you’ll need to contribute quite a lot to your pension each month to give yourself enough to live on when you retire. 

But if you start in your 20s, you’ve got loads of time. That means you can contribute smaller amounts over a longer period of time, without overstretching yourself.

2. Compound interest.

The longer you leave your money sitting in your pension pot, the longer it has to keep growing and making you more money. This is known as compound interest.

For example, if you invest £1,000 in your pension’s first year and you make a 5% return, which is £50, you’ll then have £1,050 going into your second year.

Let’s say you make 5% again the next year, your £1,050 now makes £52.50, so you now have £1,102.50, and this carries on every year, plus you are adding to it too! This is how you can start to grow a small figure into a large amount over time.

If you continue that for say, 45 years, and if you were adding £100 per month to your pension, you’d have a massive £212,000 when you retire!

It’s true that retirement might seem like a long way off right now. But it will creep up on you quicker than you think! By starting a pension now, you’ll be able to put money aside for later on in life without worrying or overstretching yourself. 

What age can you start a pension?

A keen young-un are you? Great! You can start a pension from the age of 18. And we highly recommend it. Imagine how big your pension pot will be by the time you retire! Get saving!

You’ll have to start a personal pension unless you’re working, in which case your employer should set you up a pension through something called auto-enrolment, which means they’ll open a pension unless you opt-out.

If you don’t have an income, you can make contributions of up to £2,880 per year, and you’ll get a government bonus of £720 too! So a total of £3,600.

Here’s where to find the right personal pension for you.

When is it not a good idea to start a personal pension?

Okay, so you already know how much we love pensions. And you already know that you can (and probably should!) start a personal pension even if you already have a workplace one. But there is one instance where starting a personal pension might not be the best idea for you. 

Remember how we said that with a workplace pension, your employer has to contribute every month alongside you, out of their own pocket? Well, the minimum they can contribute is 3% of your salary. But they can contribute more.

Many employers choose to up their contributions to give their employees a perk and attract great people to their companies. In fact, it’s not uncommon to see employers offering to match your contributions. In other words, if you pay in 5% of your salary (the minimum you’re allowed to contribute to your workplace pension) then they’ll pay in 5%. But if you pay in 7%, they’ll do the same and pay in 7%.

So, why are we telling you all this? Well, if you’re one of these lucky employees and you have the capacity to pay more into a pension pot than what you’re currently doing, your best decision is to up your contributions to your workplace pension. 

That way, you can boost the amount that’s going in there by getting your employer to pay in more. It’s free money after all!

You should only think about starting a personal pension when you’re maximising the amount you can get from your employer (most employers will cap their contributions at some point). In other words, don’t start a new pension until you’re getting as much from your employer’s pocket as possible. Makes sense, right?

Combining old pensions

With a private pension, you can also combine all of your pensions into a single pension – called pension consolidation. Although you don’t have to do them all if you don’t want to.

If you do have any, it’s often a great idea to combine them, as rather than old pensions just sitting around collecting dust, probably not growing that much, and paying high fees (taken directly from your pension pot), they could be with a great provider, who has low fees, and great performance.

It also removes the chance that you might forget about them, and a lot of people do! Over 1.9 million pension pots are lost, totalling a massive £19.4 billion (according to The Association of British Insurers).

It’s super easy to combine your pensions too – your new private pension provider will handle it all for you, all you need to do is let them know who your old provider is, that’s it. If you have forgotten, get in touch with your old HR department, and they should let you know. Or, try the Government’s Pension Tracing Service.

A great provider who makes pensions easy is PensionBee¹, it’s low cost too, and you’ll get a dedicated account manager, who will handle the whole pension transfer process, and keep you updated along the way.

Do I need to start a workplace pension?

If you’re employed and you earn more than £10,000 per year, the chances are your workplace will have to automatically create a pension for you, known as auto-enrollment. So, you’ll get to benefit from a workplace pension without having to do a thing!

The only exceptions are if you’re working outside of the UK, if you’re under the age of 22 or you’re over State Pension age (we’ll explain what this is in a minute, but at the moment it’s 66).

Do you earn less than £10,000 per year? Don’t worry, you can still get a workplace pension (as long as you’re earning at least £6,240 per year). However, your workplace won’t have to automatically enrol you. Instead, you’ll have to ask them to set a pension up for you (but the good news is they can’t say no!).

You can opt out of receiving a workplace pension but it’s really important that you get one if you’re entitled to one. Not only does it help you save up for later on in life, but your employer also has to contribute at least 3% of your salary to it each month alongside you. And you don’t have to pay tax on the money you put in there either!

Do I need to start a State Pension?

No, you don’t need to start a State Pension. As long as you qualify for it, you’ll be able to start claiming it once you reach State Pension age. Hooray! The State Pension age is currently 66 but it’s slowly getting higher – for people born in April 1960 or after, it’ll be 67 and then it’s going to gradually climb to 68.

That said, even though you don’t have to start a State Pension, it’s important to check that you qualify for one. Let us explain.

To qualify for the State Pension at all, you’ll need to make National Insurance contributions for at least 10 years (National Insurance is a payment you make to the government alongside your taxes, to cover things like healthcare). And to qualify for the full State Pension (that £203.85 per week we told you about earlier), you’ll need to make National Insurance contributions for at least 35 years. We know, it’s a long time!

Now, if you earn more than £242 per week (or make a profit of at least £6,725 per year if you’re self-employed), you’ll have to make National Insurance contributions. So, you should qualify no problem. 

If you earn more than £123 per week (but less than £242), you don’t have to make National Insurance contributions. BUT your contributions will be marked as paid on your record all the same, so you can still qualify. Nice one!

The tricky bit comes in if you earn less than £123 per week. If this applies to you, you don’t have to pay National Insurance. You might think that’s a good thing, but sadly, your contributions will be marked as unpaid on your records, which could easily mean no State Pension for you later on in life.

To avoid this from happening, you can make voluntary National Insurance contributions (in other words, you can volunteer to pay National Insurance even though you don’t have to). We know, we know, paying something you don’t have to pay may not sound like your idea of fun. But at least it means you’ll qualify for that State Pension. Your older self will thank you for it!

What happens when it comes to retirement?

When it comes to retirement, and withdrawing your money, there’s a few different things to consider – and a financial advisor can definitely help you here, along with retirement options, setting retirement goals based on your personal circumstances.

At the age of 66, you’ll get the State Pension (if you’re entitled to it), although you can defer this if you like – you’ll still get the pension money, but it will just come in the form of higher weekly payments when you do pay it.

With a private pension, so that’s your personal pension and your workplace pension(s), you can actually start taking it from age 55 (57 from 2028). And, the first 25% of your pension pot will be completely tax-free – and you can take this as a tax-free lump sum if you like (all in one go).

Note: if you start withdrawing from your pension, the amount you can still pay into your pension will typically reduce to £10,000. This is called the Money Purchase Annual Allowance (MPAA).

With the remaining 75%, you’ll pay Income Tax on it, just the same as your salary now. How much you’ll end up paying depends on how much your pension income is at the time, and you’ll still get the tax-free Personal Allowance of £12,570, before you need to pay any tax (although the State Pension is included in this).

How you want to take it is completely up to you too – you can either withdraw money directly from your pension pot as and when you want it (such as monthly pension income), which is called pension drawdown. You can keep your money invested in investment funds too.

Or, you could buy an annuity, which is essentially swapping your pension pot for a guaranteed income for the rest of your life, or a set number of years.

Note: tax rules can change over time – so best to check before you retire, just to be sure.

Ready to start a pension?

Retirement may seem like a long way off right now, but trust us, it’s never too early to start thinking ahead. The more you save for your retirement now, the bigger pension fund you’ll have, and so bigger retirement income! Small savings now have a big impact in the future!

In fact, the earlier you start a pension, the easier it will be to make sure you’re happy and comfortable in your old age – so less worrying about how to pay for the family lunch when you retire and more worrying about how to make that garden perfect.

Plus saving into a private pension means you can save a lot of your hard earned money from Income Tax. 

If you’re self-employed, we highly recommend starting a personal pension as soon as you can, as your pension is all up to you, you won’t have a workplace pension scheme – you’re responsible for your own pension contributions and pension investments (although you can let the experts handle that).

If you’re ready to start a pension, check out our reviews for our favourite providers – PensionBee¹and Moneyfarm¹. They make it easy and even fun (yes, it’s true!) to see what your money is doing and watch it grow. We’ve also put together the best personal pensions.

Oh, and you’ll thank yourself when you’re old and grey, we promise!