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 set up independently, rather than through an employer. It is designed to help you build retirement savings and is available to UK residents aged between 16 and 75. A parent or legal guardian can also establish a pension on behalf of a child under 16.

Personal pensions are flexible. You can hold one alongside a workplace pension, or use it as your primary retirement arrangement if you are self-employed, not currently working, or want greater control over how your pension is invested. You do not need to be earning to contribute, and you can also pay into a pension for a spouse, partner, or child.
When you set up a personal pension, you choose a provider, often an insurance company or investment platform.

Contributions are invested in selected funds to grow your pension pot over time. Payments can be made by you, your employer, or even third parties, depending on your circumstances.

Tax relief on contributions

One of the key benefits of a personal pension is tax relief. If you are a UK taxpayer, the government effectively tops up your contributions.

For every £80 you pay into your pension, HMRC adds £20, for a total contribution of £100. This basic-rate tax relief is claimed automatically by the pension provider and credited to your pension pot.

If you pay income tax at a higher or additional rate, you can reclaim further tax relief through your self-assessment tax return. The amount of relief available is subject to limits based on your earnings and annual pension allowances.

How much can you contribute?

The Annual Allowance sets the maximum amount you can contribute to pensions in a tax year without incurring a tax charge. For the 2025/26 tax year, this is £60,000 or 100% of your UK relevant earnings, whichever is lower.

If you exceed this limit, a tax charge may apply. However, unused allowance from the previous three tax years can often be carried forward, provided you were a member of a registered pension scheme during those years.

It is also important to be aware that once you start taking flexible income from a pension, a reduced limit known as the Money Purchase Annual Allowance may apply. This can significantly restrict how much you can contribute tax-efficiently in future.

Taking tax-free cash and income

From age 55, rising to 57 from April 2028, you can usually take up to 25% of your pension fund as a tax-free lump sum. The remaining balance can then be used to provide taxable income.

Withdrawals above the tax-free amount are treated as income and taxed at your marginal rate. This means careful planning is important, as larger withdrawals could move you into a higher tax band.

You can access your pension in different ways. Options include receiving a series of lump-sum payments that are partly tax-free and partly taxable, or moving the fund into a flexible drawdown arrangement, where income is withdrawn as needed while the remaining funds remain invested.

The eventual value of your pension pot depends on several factors, including how much is contributed, investment performance, charges applied to the plan, and any advice fees where applicable.

Accessing your pension

Personal pensions usually have a selected retirement age, often between 60 and 65, but benefits can normally be accessed from age 55, rising to 57 in 2028. You do not need to stop working to take money from your pension.

Common options at retirement include purchasing an annuity to provide a guaranteed income for life, using flexi-access drawdown to take income while remaining invested, or withdrawing funds as lump sums. Where investments remain in place, market performance and withdrawal levels can affect how long your pension lasts, particularly in the early years.

What happens on death?

The tax treatment of pension benefits on death depends largely on your age at the time.

If you die before age 75, beneficiaries can usually inherit any remaining pension funds as a lump sum or as income through drawdown, free of income tax. If death occurs after age 75, withdrawals made by beneficiaries are taxed at their own marginal rate.

In the Autumn Budget 2024, the government announced that pensions will no longer be exempt from Inheritance Tax from April 2027. This means pension funds may form part of your estate for inheritance tax purposes, making estate planning and regular pension reviews increasingly important.