Updated: January 14, 2020

Company Pension vs. Personal Pension Schemes

What are the key differences between a company pension scheme and a personal pension? This guide compares both so you can make an informed choice.

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Richard Angliss

Author: Richard Angliss - Finance Expert

Updated: January 14, 2020

If you’re a member of a company pension scheme then you may feel you’ve already got your retirement income needs covered. However, many people like the flexibility and portability offered by personal pensions and set up a personal scheme alongside the pension provided by their employer.

This easy guide explains the differences between a company and a personal pension to help you decide what might be best for you.

Is a company pension a personal pension?

Some companies arrange personal pensions as company pensions, but not all company pensions are set up this way. With a company pension plan, a percentage of your salary is paid into your pot every payday and employers must make contributions of at least 3% too. A personal pension you set up for yourself to save for your retirement.

You will be auto-enrolled in a company pension if:

  • You work in the UK
  • Not already a member of a suitable company pension scheme
  • You’re aged over 22 but below state pension age
  • Employed and earning over £10,000 per annum

With a company pension you and/or your employer make contributions to your pension savings until you leave the company, although you can take it with you via a pension transfer if you’re changing jobs. The contributions are invested by the pension provider and remain invested until you reach retirement.

Personal pensions are usually defined contribution schemes. The income you will receive on retirement from a personal pension depends on the payments you have made and how well your pension investments have performed over time, among other factors.

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Company pension vs. personal pension

Pensions are is tax-efficient, no matter what kind of pension you opt for. If you’re weighing up the pros and cons of whether to join your company pension scheme or set up your own personal pension, here are some comparison points for you to consider:

Company Pension

Contributions to your company pension are taken from your salary before any tax has been paid and is invested for your retirement.

A £100 contribution to your pension would have been taxed at 20% if it had been paid to you as part of your salary, but the tax relief means the full £100 is invested directly into your pension fund. For higher rate taxpayers, the impact of this is particularly significant.

If your employer pays into your pension scheme it’s effectively free money and will help increase the value of your pension pot overall. One of the biggest benefits of this is that you could gain year on year due to the compound interest that pension funds can potentially generate.

If your employer runs a final salary scheme it’s likely the contributions will be even more generous since they will be keen to fund the ‘final salary’ promise. A final salary scheme can be non-contributory or contributory. The amount put into the scheme depends on the employers needs to meet the expected pensions they will have to pay out in the future as the amount you will receive depends on what percentage of final salary needs to be funded for.

Lack of control over where your pension pot is invested may give rise to concern and there have, in recent years, been cases where workers have contributed to their company pension for years. Due to poor investment decisions and/or bad timing, the pension they have received has fallen short of their expectations.

The Pension Protection Fund set up by the government may go some way to protect you in a situation like this, but you may find that you don’t see the full value of the contributions you have made over a lifetime of work.

Personal pension

A personal pension is a defined contribution pension. You choose the provider and arrange for your contributions to be made from your net income. The tax relief is then claimed back on your behalf by the pension provider and added to your pension fund.

If you are a higher rate taxpayer you can claim the additional rebate on your tax return.

Your pension investment accrues in line with the contributions you make, and your pension pot could potentially grow with compound interest year-on-year, tax-free.

You can choose how and where your pension fund is invested. There are a wide choice of pension investments you can make, made even more diverse if you opt for a SIPP.

If you are risk averse, you may be wise to speak to an advisor with a solid track record of making sound investment decisions, rather than handle things yourself.

How much can I save?

The size of the pension income you can retire on will depend on:

  • How long you save for
  • How much you have paid in to your pension fund
  • Investment performance over time
  • Whether your employer has made contributions to your fund
  • How charges have been taken by your pension provider

A major benefit of having a personal pension is that if you change jobs, your existing pension continues unaffected.

If you choose to stop making payments to your personal pension, you can do so but be aware that charges will continue to be taken and you could risk the value of pension investment being eroded over time.

If you would like to know whether a company or personal pension is the best decision for you, talk to one of the pension experts we work with.

They will be able to help you make a well-informed decision about the best course of action for planning your future retirement income.

 

Can I have a personal and a company pension?

Yes, there’s nothing preventing you from setting up your own personal pension plan, even if you’re already a member of your company pension scheme. While there are maximum limits to the amount of money you can pay into pensions in a year, there are no limits as to how many pension arrangements you can belong to.

If you have multiple pensions you may find it easier to manage your investments by consolidating them into one pension scheme. In doing this you will be able to manage your pension investments more easily, benefit from a wider choice of investments and potentially save money on fees as you won’t be paying multiple providers to look after your pension funds.

Many people decide to set up a pension of their own to help them save for their future retirement. Because most personal pensions are flexible and portable, you can continue to make contributions to the same plan if you change jobs or stop working.

Can a company make contributions to my personal pension?

Yes, your employer can make contributions to your personal pension. Although a personal pension is a scheme owned by you, other people can make contributions to your pension.

Employer contributions count towards your annual allowance, which is usually £40,000. While your personal contributions are limited by the amount you earn, employer contributions are not limited.

As well as employers, your spouse or partner can also pay into your pension plan. This can benefit couples where one of you takes time out of work to bring up children or suffers from long term ill-health and can’t work or afford to make contributions of their own.

How does a company make payments?

The simplest way your employer can make payments to your personal pension is through direct debit, although it may also be possible to send a cheque which might be preferable if employer contributions are irregular.

Speak to an expert

Pensions are a complicated topic with many rules and regulations. Talking to one of the experts we work with can make things simple. All the experts are independent financial advisors with access to all the pension providers across the UK.

Call 0808 189 0463 or make an enquiry for a free, no obligation chat and we’ll introduce you to one of the pensions experts we work with.

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We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions. Ask us a question and we'll get the best expert to help.

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Richard Angliss

Richard Angliss

Finance Expert

About the author

Richard Angliss has made a career in financial services which stretches over 40 years.

His early career was spent learning about the various financial products and applying them to prudent advice, working for one of the largest life assurance and investment firms. After that he joined the financial services arm of a very well-known firm providing independent advice to their 8 million customers.

For the last 20 years he has been involved in building software solutions that help Advisers and clients work together to achieve good financial outcomes and helping to set up three independent advisory firms. He also has written many articles for financial services publications and provided commentary for newspaper journalists.

At an early stage in his career he realised the great satisfaction that comes with being able to help people achieve their goals and protect their families. “Regulation of financial services has hugely impacted on ensuring people get appropriate advice. The issue these days is access to that advice and just as importantly regular reviews to make sure that everything stays on track”.

With the growing development of online resources such as Online Money Advisor he sees a great future for people to access advice to make their pension and investment work harder for them.  Plus, of course, to ensure they have insurance products in place that will be required when unforeseen events happen.

He knows getting that balance right is crucial to prudent financial planning and the wellbeing of individuals and their families.

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