The pros and cons of getting a personal pension plan

Are you weighing up whether to opt for a personal pension plan, rather than joining your company pension plan? Read on for the pros and cons.

If you are employed, then you have likely been auto-enrolled to your company pension but have you ever considered signing up for a personal pension?

If you are looking for another way to prepare for the future, or have a question about pensions, check out our ultimate pros and cons list.

The pros of a personal pension plan

Here are five advantages of a personal pension plan.

1) Tax benefits

A personal pension plan is essentially a long-term savings plan with the added benefit of tax relief. Whatever you save in your pension will get tax relief, so the more money you have in your pension means more money in your pocket and less money going to the government.

You also have the option to take a 25% tax-free lump sum out of your pension once you reach retirement age.

2) Anyone can contribute

You can have a personal pension whether you are employed, self-employed or not working – and other people can contribute to your pension! If you are employed, then your employer can pay into your workplace pension scheme. You can contribute to your partner’s pension or even your child’s pension as well.

if you are splitting from your spouse, your pension should be part of your financial consideration during your divorce negotiations. Find out how to split your pension fairly here.

3) Flexibility

Personal pension plans are more flexible than your workplace pension because even when you change jobs or stop working you can still continue contributing to the same plan.

4) Guaranteed retirement income

Upon retirement, you can take 25% of your pension pot as a tax-free lump sum and withdraw the remaining funds as an income. This means you can still benefit from returns on the investment your pension is in. Alternatively, you can use your funds to buy an annuity and provide a guaranteed income for your retirement years.

5) Earn compound interest

The sooner you start contributing to a pension scheme, the more you will benefit from the compound interest that you can earn. In the first year, you will benefit from the compound interest, in the second year you earn interest on the initial investment and on the first-year return.

By the third year, you will earn interest on your original contribution and two years of returns you have already accrued, and these gains continue to multiply as you make regular contributions. 

The cons of a personal pension plan

Here are three disadvantages of a personal pension plan.

1) Lack of access

The one major disadvantage of a personal pension plan is that you cannot access it without incurring damaging costs and fees before the age of 55. 

2) Investment risks

Your pension pot can be invested in bonds, or stocks and shares and whilst you can mitigate the risks associated with this by seeking professional advice, it is impossible to guarantee that the investment your pension is in will perform well meaning you could lose money this way.

However, because a pension is a long-term investment, although you may suffer losses in the short term, the long-term gains may outweigh any losses you incur. (You can find out how safe your pension is here.)

3) It’s complicated

Pensions are a highly regulated financial product, so they come with all kinds of different rules and regulations. This means it can be incredibly difficult for people to understand exactly what they can and cannot do with their pension which can make the whole thing a little overwhelming and off-putting.

Are you a mum without a pension plan? Find out your legal rights to your spouse or partner’s pensions here.