Hoping to earn more in retirement than you’ll get from the state pension, but not sure what your options are? One choice is to save into a private pension. Private pensions are completely separate from the state pension and benefit from generous government tax breaks. We outline the key differences between state and private pensions, and why it can be a good idea to have both.
Finder survey: Do you currently have a private pension?
Response
No
58.82%
Yes
41.18%
Source: Finder survey by Censuswide of Brits, December 2023
What is the state pension?
This government-backed pension scheme gives you a weekly pension income when you reach state pension age. This is currently 66, but it’s due to rise to 67 between 2026 and 2028. It’s provisionally due to rise again to age 68 between 2037 and 2039, but this hasn’t been confirmed. You can check your state pension age based on your specific birth date using the government’s state pension calculator. The income you eventually receive depends on a number of things, including when you joined the scheme and your National Insurance contribution record.
Who can have the state pension?
There are 2 forms of state pension: the “old rules” state pension, which those reaching state pension age before 6 April 2016 receive. And the “new” state pension, which anyone reaching state pension age since then will receive. As most people eligible for the old state pension will already be receiving it, this guide focuses on the new state pension. You can find out more about the 2016 changes in our full state pension guide.
You can’t make direct financial contributions towards the state pension. Instead, to be eligible for the new state pension you need at least 10 qualifying years on your National Insurance record. You accumulate qualifying years through one of the following:
Working and paying National Insurance contributions
Getting National Insurance credits, such as if you are unemployed, or a parent or carer
Paying voluntary National Insurance contributions
To qualify for the maximum amount of the new state pension, you need 35 qualifying years.
How much is the state pension worth?
The amount you’ll receive in income depends on your number of qualifying National Insurance years. As of the 2021/2022 tax year, you’ll get:
£179.60 a week (£9,339.20 a year) if you have 35 or more qualifying years
£51.31 a week (£2,668.12 a year) if you have the minimum 10 qualifying years
If you have between 10 and 35 qualifying years, you’ll receive a pro-rata income. If you have less than 10 qualifying years, you won’t receive the state pension. If you’re worried that gaps in your National Insurance record will affect your qualification, you can usually make voluntary contributions to plug the gaps.
What is a private pension?
A private pension (also known as a personal pension) is set up on your own (as opposed to workplace pensions, which are set up by your employer). You pay money into the scheme either regularly or on an ad hoc basis and these funds are invested. It’s completely separate from your state pension. If you don’t have a workplace pension or want to contribute more towards your pension than your workplace scheme allows, you can set up a private pension on top of the state pension to give you a little more on your retirement.
Who can have a private pension?
Anyone can. There are no eligibility criteria attached to having or benefiting from a private pension. You can even take out a private pension on behalf of a child. All you need are funds to pay in (some private pension schemes require minimum contributions) and the time and will to research providers and open the scheme. Some private pensions known as self-invested personal pensions (SIPP) also require you to actively manage the investments that hold your pension funds.
How much is a private pension worth?
Unlike the state pension, which guarantees a certain regular income depending on your National Insurance record, it’s not possible to put a general figure on how much private pensions are worth. That’s because the value of a private pension when you retire is entirely dependent on the following:
How much you pay in and over what period
The performance of the investments your money is placed in
The charges you pay for administration and management of the scheme
These factors will all influence how much you have in your private pension “pot” when you retire. Higher contributions, lower charges and strong investment performance will result in a bigger pot than the opposites.
What are the main differences between the state pension and a private pension?
State pension
Private pensions
Who is eligible?
Anyone with at least 10 qualifying years on their National Insurance record
Anyone – there are no eligibility criteria to open a private pension, though some schemes require minimum contributions
Who provides the scheme?
The UK government
A private pension provider that you choose
How do you contribute?
By making National Insurance contributions or building up National Insurance credits
By paying in regular amounts, lump sums or a combination
How much do you get?
The new state pension gives you a maximum income of £9,339.20 a year
Pot value when you retire depends on contributions and investment performance
How do you receive your pension?
As a regular weekly income into your bank or building society account
You decide whether you use your pot to buy an income, or leave it invested to draw it out as needed
You don’t need to do anything to actively join the state pension. As soon as you start making National Insurance contributions, your qualifying years will start totting up. Once you have 10 years on your National Insurance record, you automatically qualify to receive state pension payments once you reach state pension age.
How do I join a private pension?
To set up a private pension, you can either research and choose a provider and set your pension up yourself or ask a regulated financial adviser to recommend a provider for your specific needs (there will be a fee for this service). Our guide on private pensions has tips on what to look out for when selecting a scheme provider.
Which type of pension is easier to manage?
A state pension usually doesn’t require any management at all. It is set up by default as long as you meet the eligibility criteria, and you reap the eventual benefits in the form of regular income. The only thing you need to do is keep an eye on how your National Insurance record is getting on and, if you wish, make additional voluntary contributions to plug any gaps. You can check your likely state pension entitlement and find out how to increase it by getting a state pension forecast.
So, by default, a private pension involves a bit more effort on your part. With standard personal pensions, the provider will manage the day-to-day running of the account and where your money is invested, so it won’t be too much hassle in the long run. But at the very least you’ll need to do upfront research to choose a provider, decide on a broad investment approach and keep an occasional eye on the performance of your pension investments. This will include looking out for any increases in pension charges as these can eat into the value of your account.
If you opt for a self-invested personal pension, unless you employ someone to do it for you, you’ll be in charge of managing the account, including picking investments and making trades. Some people may prefer this level of control, but a SIPP will inevitably take more time and effort to manage.
Regardless of what type of pension you opt for, the effort will seem worth it if (as you’d expect over several decades) your investments grow in value and provide a welcome boost to your pension funds.
Do I pay income tax on my state pension or private pension contributions?
Your state pension eligibility is related to your National Insurance contributions (which are made from your gross earnings, before tax), so income tax is a moot point.
And while it is likely you will have paid income tax on contributions you make to a private pension, you will then benefit from government tax relief on those contributions. This means that the pension provider will claim back basic-rate (20%) tax from the government and add it to each contribution you make to your private pension. If you’re a higher-rate taxpayer, you can claim back the extra via a tax return or directly from Her Majesty’s Revenue and Customs (HMRC).
Which type of pension will be worth more when I retire?
Your state pension has a fixed value, subject to the number of qualifying years on your National Insurance record. A private pension may be worth more or less than this, depending on how much you’ve paid in by the time you retire and the performance of your investments.
If you only have a small private pot when you retire (£10,000, say), that’s very unlikely to be worth more to you than the state pension, unless you have a very short life expectancy.
If, on the other hand, you have a £250,000 pot, there’s a reasonable chance this will be worth more over your lifetime than your state pension.
Let’s say you start withdrawing both pensions at age 66 (the current state pension age) and survive for another 25 years. By the time you die, you’ll have received at least £233,480 (25 x £9,339.30) from the state pension. In practice, it will be more than this, because the state pension increases each year by at least 2.5%, in accordance with the triple lock rules.
And let’s say you take the same amount (£9,339.30) out of your private pension pot each year through pension drawdown. On paper, after 25 years, you’ll have a bit over £16,000 in your pot that you can leave to your beneficiaries. But again, it’s not quite that simple. On the downside, pension charges will eat into the value of your pension pot. But on the upside, most of your money will be left invested, initially at least. And invested money has the chance to grow. There’s a decent (though not guaranteed) chance that investment growth will outweigh the triple-lock increases of your state pension.
So, in answer to the question of which type of pension will be worth more, the answer is, as is often the case: it depends.
How can I withdraw money from a state pension vs private pension?
You receive your state pension as a fixed weekly income that is guaranteed for life from the time you reach state pension age. You won’t start receiving it automatically. Instead you need to apply online to start receiving it.
How you withdraw money from a private pension is a tad more complicated. You not only need to decide when you want to start accessing your funds (you can do so any time from the age of 55, though this may be increasing to 57 from 2028). You also need to decide how you want to access the money.
All private pension schemes are defined contribution schemes. Options for accessing the money in these schemes includes taking a 25% tax-free lump sum, buying an annuity or opting for pension income drawdown. You can read more about these choices in our guide to defined contribution pensions.
Do I pay income tax on my state pension or private pension income?
Other than the 25% tax-free lump sum that you can take from your combined workplace and private pensions, all other pension income is taxable at your marginal rate.
In practice, if your only retirement income is from the state pension, you usually won’t pay any income tax on it. That’s because (as of the 2021/2022 tax year) the maximum state pension entitlement (£9,339.20 a year) is lower than the standard tax-free personal allowance on income (£12,570).
However, you’ll need to pay income tax on any earnings above the tax-free allowance. So if income from a private or workplace pension pushes your income above this limit, you’ll pay tax on it. It’ll be at a rate of 20% on anything between £12,570 and £50,270, and 40% on income above this (up to £125,140).
Who is likely to benefit more from the state pension?
It’s arguable that everyone who receives it benefits from the state pension. However, you’re likely to feel the benefit more if your ability to pay into a workplace or private pension has been limited over your lifetime, as your state pension will make up a bigger proportion of your total pension pot. And, of course, those who have built up at least 35 years on their National Insurance record will receive the highest level of state pension income.
Who is likely to benefit more from a private pension?
You’re likely to benefit most from a private pension if you’ve had the financial means to build up pension savings in addition to the state pension, but haven’t had access to a workplace pension. This might be because you have been self-employed, have worked abroad or have taken time out of work to raise a family or for another reason. For people in these or similar circumstances, a private pension is a good way to save for retirement. That’s thanks to the tax relief available on contributions.
What are the advantages and disadvantages of the state pension?
Advantages
If you make enough National Insurance contributions, you’re guaranteed a fixed income for life
State income is capped at a certain amount that may not be enough for most people to live comfortably
If you have less than 10 qualifying years on your National Insurance record, you get zip
What are the advantages and disadvantages of private pensions?
Advantages
Tax relief applies to private pension contributions
Potential to boost your pension income by a significant, uncapped amount (though tax relief on contributions is capped at fairly high levels)
Flexibility over how you contribute to your pension and how you withdraw the funds
Disadvantages
The money you contribute to a private pension scheme will reduce your disposable income
Funds held in private pension schemes are subject to investment risk; investment value can fall as well as rise
Private pensions require more admin than the state pension and active investment management if you have a SIPP
Bottom line
The state pension and private pensions are very different beasts that can help fund your retirement in different ways. Fortunately, though, it’s not a case of one or the other. For those that don’t have access to a workplace pension, a private pension can complement the state pension, boosting your chances of an enjoyable retirement.
Neither type of pension is better or worse. They simply serve different purposes. If the state pension provides a solid foundation of most people’s retirement plans, a private pension can give you the ability build a comfortable (metaphorical) home on that foundation.
No. The state pension and any private pension are entirely separate. One cannot affect the other.
The main other type of pension you’ll encounter is a workplace pension. This third type of pension is independent of both the state pension and any private pension. You can have all 3 if you wish. That said, if you have to choose between either paying into a workplace pension or paying into a private pension, you’re usually best off filling up your workplace pension first. That’s because your employer also has to make contributions to a workplace pension. You won’t get these if you prioritise paying into a private pension.
Pensions are long-term investments. You may get back less than you originally paid in because your capital is not guaranteed and charges may apply. Keep in mind that the tax treatment of your pension and investments will depend on your individual circumstances and may change in the future. Capital at risk.
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Ceri Stanaway is a researcher, writer and editor with more than 15 years’ experience, including a long stint at independent publisher Which?. She’s helped people find the best products and services, and avoid the pitfalls, across topics ranging from broadband to insurance. Outside of work, you can often find her sampling the fares in local cafes. See full bio
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