What are the Differences Between a State Pension and a Private Pension Plan?
It is always important to prepare for the future and one of the most fiscally sound ways to ensure steady liquidity involves choosing the appropriate pension scheme. Two of the most common options are private pensions and state-sanctioned pensions. While these terms might appear similar at first glance, it is important to note that there are a handful of differences. These disparities can have a very real impact upon your future plans, so it is a good idea to briefly highlight the important attributes of each as well as some contrasting features that should be taken into account.
Personal Pensions at a Glance
Personal pensions (also known as private pensions) are a type of defined contribution scheme which are essentially agreements between the individual and the pension provider. One interesting point to mention here is that these pensions can be obtained regardless of employment status. Those who are working can likewise benefit from the fact that employers are allowed to contribute to these plans. The main takeaway point is that personal pension plans will be determined by the individual in question. Thus, there is a significant amount of latitude in regards to a possible change in employment as well as the contribution limits associated with a specific scheme.
How do State Pensions Differ?
On the contrary, state pensions are essentially promised by the government to provide you with a supplemental source of income after you have reached a specific age. This package is funded by contributions into the National Insurance scheme. One major difference between a state pension and a private plan is that the state pensions rise by a minimum of 2.5 per cent every year in order to accommodate for annual inflationary rates. This is not normally the case in regard to private pensions.
Furthermore, state pensions can only be acquired once the individual has reached 67 years of age (at the time that this article was written). Private pensions can be accessed as early as 55 years. This is often why one will choose to enact a private pension before he or she reaches the official age of retirement within the United Kingdom; it can be used as a supplemental form of income.
A final disparity between these two plans is that state pensions currently provide £168.60 pounds per week. This is often not sufficient to make financial ends meet. Due to the flexibility of private pensions as well as the number of associated investment possibilities, these tend to be more popular for those who require a greater degree of liquidity.
Which One is the Best Option?
There are several metrics that will determine which plan is the most appropriate including:
It is wise to speak with a financial adviser in order to appreciate the additional options at your disposal.
For those who prefer not to use a financial adviser the Moneyfarm pension is a self-invested personal pension (SIPP) which means that it is continually managed by an investment team to ensure expected performance is met. You automatically get 20% tax relief which equates to a 25% boost to your pension contributions and flexible access when you reach retirement. By reflecting your investor profile Moneyfarm ensures that your pension is suitable to your attitudes towards risk and satisfies your investment needs.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes.