Is it worth setting up my own pension?

With prices of just about everything still going up it might be hard to think about putting money away for the future but, according to the latest government figures, the number of personal pension savers in the UK keeps rising. As of 2023, government statistics show there are now 6.8 million of us using pensions to help build a retirement nest egg. Let’s find out more about them and why personal pensions can be a good move for your financial future.

What is a personal pension?

But let’s not get ahead of ourselves, you might be asking ‘what is a personal pension?’ and ‘how is it different to a workplace one?’.

A personal pension is a tax-efficient account that you set up yourself and arrange your own contributions into. They’re usually opened to either supplement your workplace pension savings or, if you’re self-employed, as your main retirement savings. Like workplace pensions, you’ll get tax relief from the government on the amount you pay into it and any investment growth or income made is tax-free. But your employer won’t usually contribute to a personal pension – so if you pay into one instead of your workplace pension, you could be missing out on quite a bit of “free cash”.

There are a few different types of personal pensions you can open, with varying degrees of flexibility and investment options. One of the most common types is a self-invested personal pension, or ‘SIPP’ for short. They offer a wide range of investments and you can change what you’re invested in at any time. You can open a SIPP with investment platforms like AJ Bell and easily manage it online or using a mobile app - meaning you can manage your retirement savings at the tap of a thumb.

Do you have to pay into a pension?

The short answer is no. No one is forcing you to pay into a pension, but saving enough for retirement is an expensive and necessary financial goal. It’s made much easier the earlier you begin and it’s also easier if you never see the money going out of your bank account – which is exactly what happens with a workplace pension. You’ll be automatically enrolled into a pension if you’re over 21 and earning above £10,000 a year. Each month a small proportion of your income will be funnelled off into it before you see your pay-cheque, along with tax relief from the government and your employer’s contribution.

However, if you’re self-employed, not employed, or earn under the current threshold, it’s down to you to set up your own personal pension and keep on top of actively paying into this. The difficulty is retirement savings may not be the number one priority of someone running their own business or taking time out of work. As proven by recent figures from the ONS, showing as few as 1 in 10 self-employed workers pay into a pension.

The cost of living crisis has put extra pressure on our finances – we’re directing more of our income towards day-to-day costs, meaning our future finances could take a backseat. Being self-employed, or out of work, is likely to only add to this pressure.

Some people may also think things will simply work out in the future and a personal pension is overkill when they have other things to spend their money on now. They might be banking on inheritance, choosing not to have a family, or being able to downsize their home, or relying on the state pension providing enough income in retirement. But it’s a risky move to shun pensions entirely and if miscalculated could lead to less-than-ideal living standards in later years.

Personal pension pros

There’s a reason 6.8 million people have one though, and most of them will also have workplace pensions. So, what’s all the hype about?

Personal pensions are often more flexible than workplace pensions, allowing you greater hands-on control of what your savings are invested in. It’s also usually the case that personal pensions let you access your retirement savings a little earlier than some workplace pensions (the minimum age is currently 55, increasing to 57 from 2028). But the biggest pro of all is that, by paying into one, you’ll be building up a bigger pension pot than you otherwise would’ve had.

Research from the Pensions and Lifetime Savings Association found that someone wanting to live a ‘moderate’ retirement would need to bring home over £31,300 a year. That rises to over £43,000 for a more ‘comfortable’ standard of living. Bearing in mind that many people are now living off their retirement income for 20 to 30 years, that’s a lot of pressure on your pension pots, especially for those who are yet to even get started.

Source: Opinium/AJ Bell nationally representative research of 4,000 UK adults carried out in June 2023

Being able to live the life you want in your retirement is the ultimate reason more and more people who are in the financial position to do so, are turning to personal pensions. Though there are other ways to make sure you’re saving enough for retirement, the previously mentioned flexibility and tax benefits of personal pensions usually make them the most cost-effective way to do it.

So, are they worth it then?

Though there are lots of tempting reasons to put off saving (or saving enough) for your retirement, personal pensions are usually worth going for, even for those already paying into a workplace pension.

But of course, this isn’t advice, and everyone’s circumstances are different so take some time to reflect on your own pension position. If you're employed, how’s your workplace pension looking – could you do with supplementing your savings with a personal pension? And if you're self-employed, there’s no time like the present to review your retirement savings and set up a personal pension if you can afford to do so. Most importantly, if you need some direction on this, make sure you contact a suitable financial adviser.