A private pension is a form of retirement income that an individual pays into to form part of their pension provision separate from the state pension.
In essence a private pension is a tax free wrapper in which to save for your retirement. How you use this money is up to you. The most popular decision is to buy a type of annuity.
Because saving for a pension is tax-free, any investment into a private pension immediately gives the pension saver a big boost. If you pay £80 into a private pension you qualify for pension tax relief which means this £80 is boosted by 25 per cent to £100.
There are two main types of private pension. The first type is personal pensions and stakeholders. These usually offer a limited number of stocks and shares funds to invest in. The second main type is known as Self Invested Personal Pension Plans or SIPPS. These allow the investor to choose the type of vehicle they want to invest in and can be more risky but do come with the possibility of higher returns.
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