PENSIONS

Personal Pensions

A straightforward and efficient way to save for your retirement

Personal Pensions

A personal pension is a type of defined contribution pension that you establish yourself. It helps you save for retirement and is accessible to any UK resident aged between 16 and 75. A legal guardian can also initiate a plan on behalf of a child under 16.

You can hold a personal pension alongside a workplace pension or use one as your main retirement savings plan if you are self-employed or not currently working. You do not need to be earning to contribute, and you can also set up and pay into a pension for your spouse, partner, or child.

When you contribute, you (often with an adviser’s help) select a pension provider, usually an insurance company. Your money is then invested in a variety of funds with the aim of increasing your pension pot over time. You, your employer, and other third parties can make contributions to your plan.

Tax relief

One of the key advantages of a personal pension is the tax relief on your contributions. If you are a UK taxpayer, for every £80 you contribute, the government adds £20, resulting in a total contribution of £100. The pension provider claims this 20% basic rate tax relief directly from HMRC and adds it to your fund.

If you pay income tax at higher or additional rates, you can claim the extra tax relief, the difference between the basic rate and your higher rate, through your self-assessment tax return. The amount of tax relief you can receive is limited by your annual earnings and the yearly allowance.

Contribution limits

The Annual Allowance (AA) is the highest amount you can contribute to all your pensions in a single tax year without facing a tax charge. For the 2025/2026 tax year, this limit is £60,000 or 100% of your UK relevant earnings, whichever is lower.

If your contributions surpass this limit, a tax charge will be applied. However, you might be able to ‘carry forward’ unused allowance from the previous three tax years, provided you were a member of a registered pension scheme during those years.

Be aware that if you start taking a flexible income from your pension, a lower limit called the Money Purchase Annual Allowance (MPAA) may apply, which could considerably reduce the amount you can save tax-efficiently.

Tax-free cash

From age 55 (rising to 57 from April 2028), you can typically withdraw up to 25% of your pension pot as a tax-free lump sum. The remaining 75% can then be utilised to generate a taxable income.

Any subsequent withdrawals are taxed as income at your marginal rate, which could push you into a higher tax band. You can access your funds through various methods, such as taking a series of lump sums (part-tax-free, part-taxable) or moving the fund into a flexible drawdown arrangement to take income as needed.

The amount in your pension pot will depend on:

Taking your pension

Most personal pensions have a chosen retirement age, usually between 60 and 65, but you can start accessing your benefits from age 55 (57 from 2028). You do not need to stop working to withdraw money from your plan.

Your main options for turning your pot into income include buying a guaranteed income for life (an annuity), keeping your money invested and drawing it flexibly (flexi-access drawdown), or taking it as a series of lump sums. If you choose drawdown, it is important to be aware of investment risks, as poor fund performance in the early years can significantly impact the fund’s longevity.

Death Benefits

How your pension is taxed after death depends on your age. If you die before age 75, your beneficiaries can usually inherit the whole remaining fund as a lump sum or drawdown income, entirely free of income tax. If you die after age 75, any withdrawals they make from the inherited fund will be taxed at their own marginal rate of income tax.

In the Autumn Budget 2024, the Chancellor said that from April 2027, pensions will no longer be exempt from Inheritance Tax. That means that Inheritance Tax may have to be paid on your pension when you die.