What is a personal pension?

First published 13 October 2017 • Updated 25 September 2019

If you don’t have a workplace pension, or want to build up additional pension savings, then you can set up a personal pension. A personal pension may particularly important if you are self-employed and haven’t joined the government’s NEST pension scheme, or if you live off your partner’s income but want to have your own pension arrangements.

Find out:

  1. What is a personal pension?
  2. What is a personal pension plan?
  3. What is a stakeholder pension?
  4. What is a SIPP?
  5. Can I pay into both a workplace pension and a personal pension?
  6. Can I take contribution holidays?

What is a personal pension?

Broadly speaking, a personal pension is any pension scheme you can join yourself that is not a workplace pension (nor the state pension). However, the term can be a little confusing, as there are three main types of personal pension – one of which is simply called a ‘personal pension scheme’!

The three types are:

  • Personal pension schemes
  • Stakeholder pension schemes
  • Self-invested personal pension plans (SIPPs)

The one thing all of these pensions have in common is that they are defined contribution schemes, otherwise known as money purchase schemes. This means you save up a pot of money which is invested in a fund, and which you can access from the age of 55 onwards.

There are however some important differences between these types of scheme, which you should take into account when choosing which one might be for you.

What is a personal pension plan?

A personal pension plan is a pension that you set up yourself with the pension provider (usually an insurance company). You can have a personal pension whether or not you work, and other people can contribute to it. For example, if your spouse is the sole earner in your household but you want to have your own pension, you can set up a personal pension for your spouse to pay into.

If you are employed, you can request that your employer pays into your personal pension instead of your workplace pension. You may prefer this if you move jobs regularly and don’t want to keep joining different pension schemes. However, your employer does not have to agree.

The money you contribute to a personal pension is invested in a wide range of assets and funds, just like a workplace pension. This should generate growth over time, building up a pot of money that you can access from the age of 55.

A personal pension scheme will charge you an annual fee, usually a percentage of your pension pot (which is taken automatically). Fees are often a bit higher than those for workplace pensions.

As with all defined contribution schemes, the value of the scheme at retirement will depend on how much you have contributed and the investment growth on those contributions.

What is a stakeholder pension?

A stakeholder pension is similar in most respects to a standard personal pension. However, there are some key differences.

Differences between a personal pension and a stakeholder pension

  • A stakeholder pension may have lower annual fees than a personal pension, as these are limited by law to 1.5 per cent of pot size for the first 10 years, and 1 per cent after that. Personal pension fees may be higher.
  • A stakeholder pension may allow a lower minimum contribution than an ordinary personal pension. By law, the stakeholder pension minimum contribution is just £20 a month.
  • A stakeholder pension may offer a narrower range of funds for investing your contributions. This might result in lower growth, but this won’t necessarily be the case.

What is a group stakeholder pension?

Group stakeholder pensions used to be a common kind of workplace pension scheme, and some people still have them. If you are a member of a group stakeholder pension you can carry on contributing to it until you leave that employer.

What is a self-invested personal pension (SIPP)?

A SIPP is the most flexible kind of personal pension, in that it lets you choose the investments that make up the fund. You can choose from a wide range of asset classes including equities, investment trusts, commercial properties and government securities. This can make it an attractive option for those who like to take a more active role in investment. You can also appoint a fund manager or independent financial adviser to handle the investment strategy for you. SIPPs have the potential for higher risk, but also higher levels of growth. They may involve higher management charges too.

Junior SIPPs

You can set up a SIPP for anyone under the age of 18. This can deliver surprisingly good returns, because the money is invested for such a long time. It can also be a great way to encourage children to save for the long term. Read more about junior pensions.

Can I pay into a personal pension and a workplace pension at the same time?

You can be a member of any kind of personal pension scheme at the same time as belonging to a workplace pension scheme, and you can pay into both simultaneously if you wish. However, whether or not there is any benefit in doing so will depend on your circumstances. Bear in mind:

  • Although there is no limit to the number of pension schemes you can contribute to, there is a limit to the amounts you can save into pensions each year (the annual allowance) and overall (the lifetime allowance). Having more pensions won’t change this.
  • You’ll get employer contributions on your workplace pension, but not on your personal pension (unless you’re using it instead of your workplace pension, and your employer has agreed).

There are however some reasons why you might want a personal pension in addition to a workplace pension. For example:

  • Your workplace pension is a final salary scheme, and does not allow for additional contributions. You might therefore want a personal pension as well to boost your retirement income.
  • You want to vary your pension contributions from month to month, so you pay a small regular amount into your workplace pension, and a varying amount into your personal pension.

Can I take a break from contributing to a personal pension?

With a personal pension, stakeholder pension or SIPP you can take a contribution holiday at any time without any penalty, and restart your contributions when you are able to. This makes them particularly useful for freelancers, contractors and anyone else whose income may fluctuate throughout the year.

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About the author
Nick Green
Nick Green
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.