Nutty

Is a workplace pension a private pension?

Edward Savage
Personal Finance Editor
Updated
May 18, 2024

In a nutshell

Yep! A workplace pension is a private pension, which simply means a pension private to you, so in your name, and you own it. Rather than a public pension, which is the pension you’ll get from the government, called the State Pension (at State Pension age, currently 66).

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Yep! A workplace pension is a private pension, so it’s private to you – in your name, and you normally decide how much to pay into it, and later when to start withdrawing from it (normally when you retire).

It’s different to the public pension, which is the government pension, called the State Pension, and is what you’ll get when you reach State Pension age (currently 66). That’s provided you’ve made enough National Insurance contributions during your lifetime (at least 10 years, but 35 years for the full amount).

Pensions

You’ll get the State Pension in addition to your private pension (your workplace pension). However, it’s likely not enough to tide you over in retirement by itself, and that’s where private pensions come in (unfortunately it doesn’t even come close to what you’ll need for a comfortable retirement (more on that later)).

Here’s where it gets a bit confusing. There’s a few different types of private pensions, and there’s multiple types of workplace pensions.

Let’s start with workplace pensions.

Workplace pensions

Depending on where you work will depend on what type of pension you’ll have, and which workplace pension scheme they’ll use.

If you’re in a public sector job, such as the NHS, or another government role, you’ll typically have a defined benefit pension, and if you’re working for a regular business (private sector), you’ll normally have a defined contribution pension.

Defined benefit pensions

A defined benefit pension is where you’ll get a set retirement income when you retire, often guaranteed for life. The amount you’ll get is based on things such as how long you’ve worked there, and what your salary was.

Defined benefit pension

They can often be called final salary pensions, or average salary pensions. Although you’ll be lucky to get a final salary pension these days (which is where you retire on the same amount you got paid as your final salary).

You’ll pay into it over your career directly from your salary, and the scheme can be operated by the organisation itself, such as the NHS.

Defined contributions pensions

A defined contribution pension is where your pension is more in your control, and you’ll decide how much you want to pay in, often taken directly from your salary before you pay any tax (but you can also set up a personal pension, more on these later).

Defined contributions pension

They typically have a financial value, which grows over time, called a pension pot, such as £100,000.

Your employer will typically set it up for you, and register you onto their workplace pension scheme, called auto-enrolment, and they’ll also contribute too (required by law). If you pay in a minimum of 5% of your annual salary, your employer has to contribute 3%.

Workplace pension

Some nice employers might pay in a bit more if you pay in more too (it's worth asking).

Your pension will grow tax-free too, so it can grow much faster over time. You might pay tax when you withdraw from it, it depends on your income at the time.

You can start withdrawing from it at age 55 if you want to (57 from 2028), and 25% of it will typically be tax-free, which you can take as a tax-free lump sum if you like. (Although it’s often a good idea to keep it growing over time, until you really need it and retire.)

Private pensions

Workplace pensions

As mentioned, a workplace pension is set up by your employer, and you’ll typically make pension contributions through your pay each month, before you pay any tax.

Workplace pension tax relief

These can be either a defined benefit pension, if you’re in a public sector job, such as the NHS. Or, they can be a defined contribution pension, if you’re in a private sector job (regular job) – we’ve run through both above.

Your employer will decide which pension provider (company) to use, but you may get a choice from a few different pension plans (where your money is actually invested).

Personal pensions

A personal pension is a pension that you’ll set up yourself, so you decide which pension provider to use, and you’ll pay into it after you’ve been paid (as and when you want to).

Private pensions

You’ve got a lot more control compared to a workplace pension, and can decide how you’d like your pension to be invested so it grows over time (pensions are invested to help them become more valuable over time) – either with experts (recommended for most people), or making your own investments (which is called a self-invested personal pension, or SIPP).

You can save into them tax-free, but as you’ve already paid tax on your income (e.g. your salary), the tax you’ve paid is refunded back into your pension pot when you add money (make contributions).

Personal pension tax relief

This works as a 25% bonus from the government when you save, added automatically into your pension pot. 

Personal pension

And, if you’re a higher rate taxpayer (paying 40% tax, earning over £50,270), or an additional rate taxpayer (paying 45% tax, earning over £125,140), you can claim back some of the tax paid too (on a Self Assessment tax return).

Personal pensions are pretty great to boost your total pension pot, alongside a workplace pension, as you’ll need a very hefty pension pot to afford a comfortable retirement these days (we’ll cover that just below).

Best private pension

Check out PensionBee, it’s easy to use, has low fees and a great record of growing pensions over time.

Visit PensionBee¹Visit PensionBee¹

Get £50 added to your pension for free. Capital at risk.

Nuts About Money tip: if you’re self-employed, or become self-employed in future, a personal pension is your only option, but a great one. Learn more with our guide to self-employed pensions.

How much do you need in retirement?

It’s a great idea to plan ahead for your retirement, and take control of your own retirement savings, rather than relying on just your workplace.

To afford a comfortable retirement, you’ll need a whopping £853,039 in your private pension pot to provide a retirement income of £43,100. Yikes.

Retirement Living Standards

This income figure was determined by the Pensions and Lifetime Savings Association, and there’s 3 different income levels: minimum, moderate and comfortable. Together, they’re called the Retirement Living Standards

  • Minimum: this covers just the essentials, such as food and energy bills, with pretty much nothing left for yourself.
  • Moderate: this is more for bills, and are able to run an old cheap car, and a cheap holiday abroad per year.
  • Comfortable: this is even more for bills and some luxuries, such as eating out. You’ll be able to afford a newer car, and a more expensive holiday per year.

Note: it’s assumed you won’t have any housing costs, such as rent or mortgage payments (it’s presumed you have paid off a mortgage).

Here’s what each retirement standard looks like:

Retirement standard Yearly income (one person) Total private pension pot (and receiving State Pension)
Minimum £14,400 £130,399
Moderate £31,300 £557,413
Comfortable £43,100 £853,039

Oof. That’s a lot isn’t it? And that’s including receiving the State Pension (the government pension). We’ll cover that in just a bit.

Don’t lose hope though – pensions are really great at building up your retirement savings over time. That’s thanks to something called compound interest, which is where the money you make, begins to make money too, and this snowballs over and over, turning smaller amounts into very large amounts of time.

Let’s use an example. Imagine you have a pension pot currently worth £10,000, and you’re able to save £220 per month. If it grew at an average of 7% per year, after 25 years you’d have a massive £235,470!

Another 10 years and it would grow to £511,294, nearly double! And then just one year after that, you’d earn £35,791. How great is that?

Compound interest

The key is to start saving as soon as you can, and save as much as you reasonably can. That way the compounding effect has longer to work its magic, making your future brighter and brighter every day.

How to boost your pension pot

Now you can simply save more into your workplace pension if you want to, and it’s a good idea to make the most of the free cash from your employer, by paying in at least 5% per year, so they’ll pay in 3%.

And if they’ll add more if you add more, then take full advantage and put in as much as needed to get the most free cash (e.g. if they add 7% if you add 7%, then try and add 7%).

After that, it’s often a good idea to switch to a personal pension to continue saving. That’s because you get full control over your pension savings, rather than your employer.

Workplace pensions via your employer aren’t necessarily the best pensions out there, some have high fees, bad customer service, and don’t grow too much over time. Employers often just pick any old one to get the box ticked that they offer a pension, rather than picking the very best pension out there.

Think of a pension a bit like your mobile phone contract, or broadband provider – it pays to shop around and find the best deal and provider for you.

So, taking control of your pension with a personal pension means you can pick the best pension provider for you (such as one that’s easy to use, has low fees and a great record of growing pensions over time, alongside great customer service). More on those just below.

And, you can also decide where or how you’d like your pension invested (either letting the experts handle things, or making your own investments).

You’ll also be able to transfer your pension to another provider whenever you like in future, so you can always be with a top provider. You can’t transfer your current workplace pension (but you can transfer your old work pensions into a new single personal pension, which is called pension consolidation).

Pension consolidation

To make things easy for you, we’ve reviewed all the top personal pension providers. And here they are…

Best expert-managed personal pensions

Easy to use, and you can leave the investing to the experts.

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Get £50 added to your pension

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Best pension
PensionBee rated 5 stars

PensionBee

PensionBee is our recommended provider – they’ve thought of everything.

Their 5 star rated app (and website) makes it easy to set up and use. You can open a brand new pension, or transfer your existing pensions across (they’ll handle all the paperwork).

Simply pick from an easy to understand range of pension plans, and that’s it, the experts manage everything from there.

It’s low cost, with one simple annual fee. The customer service is excellent, and you’ll get a dedicated account manager for any questions you might have.

Learn more

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And, when the time comes to retire, withdrawing from your pension is easy too.

You can also use them if you're self-employed or a company director.

Pros

  • Pensions made easy
  • Easy to understand pension plans
  • Find all your old pensions and move them over (consolidate)
  • Low fees
  • Great customer service
  • Great if you’re self-employed (or a company director)
  • Withdraw from your pension when you retire
  • Get £50 added to your pension

Cons

  • No financial advice, but can explain your options
  • Not much else!

Capital at risk.

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Expert advice
Moneyfarm rated 5 stars

Moneyfarm

Moneyfarm is a great option for saving and investing (both ISAs and pensions). It's easy to use and their experts can help you with any questions or guidance you need.

They have one of the top performing investment records, and great socially responsible investing options too. Plus, you can save cash and get a high interest rate.

The fees are low, and reduce as you save more. Plus, the customer service is outstanding.

Learn more

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Pros

  • Great for beginners and hands-off investors
  • Easy to use
  • ISA
  • Pension
  • Free personal investment advisor
  • Great track record for growing money
  • Socially responsible options
  • Invest cash for a high return

Cons

  • Have to invest at least £500
  • Not much else!

Capital at risk.

Best private pension

Check out PensionBee, it’s easy to use, has low fees and a great record of growing pensions over time.

Visit PensionBee¹Visit PensionBee¹

Get £50 added to your pension for free. Capital at risk.

Best self-managed personal pensions

To make your own investment decisions.

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Best overall
AJ Bell rated 5 stars

AJ Bell

AJ Bell is well established, with a good reputation.

It's one of the cheapest SIPPs out there (charging a low annual fee).

There's a huge range of investment options – pretty much every investment out there (including both funds and shares).

The customer service is excellent too.

Overall, it's one of the best options for a SIPP.

Learn more

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Get £200 cashback

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Cheapest
Interactive Investor rated 5 stars

Interactive Investor

Interactive Investor is a well established company, and very popular.

Instead of paying a percentage of the investments in your account (like other investment companies), you’ll instead pay a fixed fee per month – and it’s pretty low, starting at just £5.99 per month for a pension (SIPP).

This makes it one of the cheapest SIPP providers out there, especially if you have a fairly sizeable amount within your pension (e.g. over £30,000).

On top of that, there’s huge range of investment options (e.g. shares and funds) – one of the largest.

It's easy to use, and the website and app are great. The customer service is excellent too.

A great choice overall.

Learn more

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Best private pension

Check out PensionBee, it’s easy to use, has low fees and a great record of growing pensions over time.

Visit PensionBee¹Visit PensionBee¹

Get £50 added to your pension for free. Capital at risk.

The State Pension

You’ll also likely get the State Pension, which is the pension you’ll get from the government when you reach State Pension age (currently 66).

It’s currently £221.20 per week (£11,502 per year), so not enough to live on for most people – which is why private pensions play a vital role in providing a retirement income later in life.

In order to get the State Pension, you’ll need to have paid at least 10 years worth of National Insurance contributions, and 35 years to get the full amount. 

State Pension

Let’s recap

There we have it. A workplace pension is a private pension – which is a pension all private to you. It’s in your name, you decide how much you want to save, and later on, when and how much you want to withdraw from it.

There’s two types of workplace pensions, a defined benefit pension, which are typical in government jobs, such as the NHS, where you’ll get a guaranteed income when you retire (often for life).

And then there’s a defined contribution pension, which is common in private sector jobs, where both you and your employer will pay in (you 5% and your employer 3%), so you get some free cash from your employer.

They’re pretty great overall, and can really boost your retirement income over time – and working together with a personal pension (one you set up yourself) can really improve your financial future, providing that comfortable retirement you deserve.

If you’re looking to start a personal pension, check out PensionBee¹, it’s easy to use, has low fees and a great record of growing pensions over time. There’s also Moneyfarm¹, where you can save into a pension alongside general investing, such as an ISA (tax-free savings).

Happy saving!

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Best private pension

Check out PensionBee, it’s easy to use, has low fees and a great record of growing pensions over time.

Visit PensionBee¹Visit PensionBee¹

Get £50 added to your pension for free. Capital at risk.

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This article has been fact checked.

This article was written, reviewed and fact checked by the expert team at Nuts About Money. You’re in safe hands. Learn more.

Best private pension

Check out PensionBee, it’s easy to use, has low fees and a great record of growing pensions over time.

Visit PensionBee¹Visit PensionBee¹

Get £50 added to your pension for free. Capital at risk.

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