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Opening a private pension gives you complete control over where and how your retirement savings are invested

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Pensions are long term investments. You may get back less than you originally paid in because your capital is not guaranteed and charges may apply.
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Last updated
February 19, 2024

What is a private pension?

Private pensions, often referred to as personal pensions, are a way of saving for retirement. They're pots of money that offer large tax breaks when you pay in, but that you can't access until you're 55 (or 57 from 2028). They are a type of defined contribution pension, which means that the amount you’ll get when you retire depends on how much you pay in, the tax relief you received, and how well your investments do.

The money you pay gets income tax relief – subject to an annual allowance and relevant earnings rules, and all your investment gains are also tax-free. When you stop working, you can take 25% of the money you’ve saved without paying any tax, and the rest is taxed at your marginal rate.

While personal pensions are a great way to save for retirement, if you’re employed, you should make sure you’ve been auto-enrolled and are getting employer contributions. You should also make sure you’ve taken advantage of any company matching schemes (where your boss pays extra if you choose to) before taking out a personal pension.

Generally, personal pensions are good for:

  • People who are self-employed

  • People who don’t have a workplace pension

  • People who are taking time out of the workplace

  • People who want extra savings on top of their auto-enrolment pension (however, it is usually cheaper to increase your workplace contributions as these schemes are subject to a charges cap)

  • People who want to save into a scheme for their children or grandchildren.

A private pension puts you in control of where your money is invested.”

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How do private pensions work?

When you set up a private pension, you can then start making contributions towards retirement. This could be a one-off large payment, a regular monthly payment, variable amounts throughout the year, or a combination of all of these options.

The money is placed into a pension fund, where it will usually be invested. Investments tend to include a mixture of equities and bonds, but could also include alternatives, credit, and even some cash.

The amount of control you have over the investments will depend on what type of private pension you have. For example a SIPP will give you complete control, while other providers might give you a range of managed funds to choose from. Some providers even allow you to fill in a questionnaire about your risk appetites and then choose your investments for you.

The government adds 20% to your contributions if you're a basic-rate taxpayer, 40% if you're a higher-rate taxpayer and 45% if you’re an additional rate taxpayer. If you don't pay income tax, you get 20% added to the first £2,880 paid in a year.

You are limited in how much you can save and still get tax advantages. The annual limit is £60,000, but you also can’t save more than you earn each year.  If you’re a higher earner with a salary of over £260,000 then your annual allowance will be lower.

There is currently no maximum amount you can save into your pension pot overall, but Labour has suggested it will bring the Lifetime Allowance back if it wins the next election.

Any growth of money held in a private pension is free from income and capital gains tax.

When you access your pension, you can take up to 25% of your savings tax-free up to £268,275. After that, money withdrawn from pension funds is taxed the same way as income. Find out more about pensions taxation at retirement here.

You have several options in terms of how you can take the money, which include drawdown, UFPLUS, an annuity and full withdrawal. You can find out more about pension withdrawal options with our guide and be sure to consider the tax implications carefully before you decide what to do.

What are the pros and cons of a personal pension?

Pros

They're good for people who can't get a workplace pension
You'll get tax relief on contributions
You decide how much to pay, so you can increase or reduce contributions if your situation changes

Cons

You don't get employer contributions
Management charges are usually higher than with workplace pensions
You need to make key decisions yourself on investments and contribution levels

What types of private pensions can I choose between?

A personal pension plan

A personal pension plan

With a personal pension plan, you appoint a pension company and they select the funds you invest in or give you a limited set of options from which to choose. The money is put into investments (such as shares) on your behalf by the pension provider.

Self-invested personal pension (SIPP)

Self-invested personal pension (SIPP)

With a SIPP, you choose where you invest your cash. You can think of it as a kind of DIY pension plan. Once you choose a provider, there's a large list of funds, shares and other assets to choose from. You can even use a self-invested personal pension plan to buy property.

What types of private pensions can I choose between?

A personal pension plan

A personal pension plan

With a personal pension plan, you appoint a pension company and they select the funds you invest in or give you a limited set of options from which to choose. The money is put into investments (such as shares) on your behalf by the pension provider.

Self-invested personal pension (SIPP)

Self-invested personal pension (SIPP)

With a SIPP, you choose where you invest your cash. You can think of it as a kind of DIY pension plan. Once you choose a provider, there's a large list of funds, shares and other assets to choose from. You can even use a self-invested personal pension plan to buy property.

Which pension plan is best for you?

When choosing a private pension there are two main things to look at - charges and choice.

High fees eat into your money, making any returns you make smaller.

Choice of investments is a personal matter - some people value the ability to pick what they put money into, others would rather let someone else do it for them.

In simple terms, if you are looking for control over your money, a SIPP with low charges is best.

If you want to relax and let a professional manage your cash for you, look for a managed private pension account.

But always check the fees, as there can be large differences even between firms offering what look like similar services.

The best pension plan for you is the one that offers the level of control you want at the cheapest charges.”

What are you looking to do?

Pick the option that's closest to your main pension goal

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Pensions are long term investments. You may get back less than you originally paid in because your capital is not guaranteed and charges may apply.

Workplace pensions vs private pensions

All staff aged between 22 and 66 who earn more than £10,000 from a single employer in a year will be automatically enrolled into a workplace pension.

There are plans to extend this to all staff over the age of 18, and start contributions from the first pound you earn – but there's currently no timescale for when this will come into effect.

Employers must enrol staff on workplace schemes when they join the company – and then make contributions on their behalf.

There are two kinds of workplace scheme, defined benefit (DB) or defined contribution (DC). In a DB scheme, what you get at retirement is based on your salary. They’re sometimes also called final salary or career average salary schemes. When you retire, you’re paid a guaranteed fixed amount for the rest of your life. These gold-plated schemes are rare, and most often seen in the public sector.

Most people in the private sector will be in a DC scheme. Here, what you have to retire on will be determined by how much you save, how much your employer contributes, and your investment returns. The more you put away, the better your retirement lifestyle will be.

While you'll automatically be enrolled into a pensions scheme when you start working for a company, you can opt out if you wish, but this means you will lose out on the top-ups your employer would otherwise make and the tax relief.

Having a workplace pension doesn't mean you can't also have a personal pension as well if you want to make additional contributions. However, it makes sense to take advantage of employer top ups if you can. Some employers will offer to match any extra contributions you make, meaning you’ll get a better return if you save more into your workplace scheme.

People enrolled in workplace pensions[1]
26.3million
Comparing workplace and personal pensions
Private pensionWorkplace pension
Choice of providerYesNo
Choice of investmentsYesMaybe
Government top upYesYes
Employer top upNoYes
FeesUncappedCapped
ContributionsFlexibleFixed minimum, but you can pay in more

What are your pension options if you're self-employed?

Being self-employed doesn't stop you signing up to a private pension, or receiving tax breaks on contributions.

In fact, you can even sign up to Nest - a national pension scheme set up to make it easier for employers to meet their duties under automatic enrolment. 

The main difference is that if you are a higher-rate taxpayer, you will have to claim tax relief as part of your self-assessment form to get the full 40%.

Number of self-employed Brits[3]
4.37million

Can you transfer a pension?

You can’t usually transfer your current workplace pension to a new provider, but you can transfer old workplace schemes or private pensions. There are several reasons why you might want to transfer your pension:

  • You’ve switched jobs and want to consolidate multiple pensions in a single pot

  • Your current pension scheme is being closed

  • You have found a private pension that offers you a better deal than your current provider

You can switch pension savings between registered UK pension providers without losing any of your tax-free benefits.

However, if you take an “unauthorised payment” from your pension – which includes taking your pension as a lump sum or transferring the pot to somewhere other than a registered UK pension provider – you must pay tax on the transfer.

Before transferring your pension, check that:

  • Your existing scheme allows you to transfer out

  • Your new scheme accepts inward transfers

  • You aren’t giving up any valuable benefits such as guaranteed annuity rates

You may be charged a fee by your existing scheme, plus they have to agree to pay into your new pension scheme, to make the transfer.

Also check before switching to see if you are giving up any existing rights, including the right to take more than 25% of the pot as a tax-free lump sum, or to draw your pension at a certain age.

The easiest way to find out if any of these conditions will apply is to speak to your pension providers.

How do pension tax breaks work?

Tax breaks on pensions work to ensure a simple premise: that you’re only taxed on the money once.

This means workplace and private pension contributions qualify for income tax relief - which can be paid into your pension to further swell its coffers. Once transferred to your pension pot, any growth in your savings is also largely tax-free.

If you are a higher or additional rate taxpayer saving into a private pension or non-salary sacrifice workplace pension, you will need to do a self-assessment tax return to claim your higher rate of return.

But while you escape tax when building up a pension pot, when you start drawing on it to fund your retirement it will be subject to the same rate of income tax as if it were money earned through a job.

Note that workplace and private pensions come with limits on the tax relief you can get:

  • You can only pay in the equivalent of your annual salary in any given year - with a hard limit of £60,000 no matter what you earn

  • Once you start drawing on your pension, the amount you can put away each year and still get a tax break falls to just £10,000 

A lifetime allowance on what you had saved up overall used to apply as well, but was scrapped on April 6, 2023. It might not be gone forever though, as Labour have said they plan to bring it back if they win the next general election.

Private pension contributions[2]
£11.7bn
How much pension do you need to retire?
What you'll each need saved up by retirement to afford different lifestyles as a single person and as a couple.

Source: PSLA Retirement Living Standards 2022 report. Assuming full state pension.

Pensions calculator

Find out how much you'll have saved up by retirement and how long your pensions savings will last before they run out with our pensions calculator.

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Is my money safe in a pension?

Pension investments and contributions are regulated by three independent organisations. Make sure your pension is overseen by one of these groups before investing in it – this guarantees your money is protected.

The Pensions Regulator

This organisation oversees UK workplace pensions – both defined contribution and defined benefit.

The Financial Conduct Authority

The FCA regulates SIPPs, personal pension plans and other private pension schemes.

The Pensions Protection Fund

Looks after those with defined benefit pensions. If your company goes bust, it will pay out in its place.

Private pensions vs lifetime ISAs

Pensions are not the only way to get a top up on your retirement savings. Another option is lifetime ISAs.

If you save into a lifetime ISA, the government adds a 25% top up, as long as you wait until you're 60 to withdraw the money or use it to buy a first home.

But there are conditions attached.

  • Firstly, you can pay in no more than £4,000 a year

  • Secondly, you can only open one between the ages of 18 and 40

  • Thirdly, you can only pay money in between the ages of 18 and 50

However, they have two key advantages over private pensions as a way to save.

The first is that money is tax free when you withdraw it. The second is you can access your money before 60. However, if you choose to do that, you'll lose 25% of anything you withdraw unless you are using the money for a first home.

Lifetime ISAs can provide a welcome boost later in life, but don't replace pensions entirely.”

Pension compensation

The level of compensation offered depends on the type of pension you have and which organisation regulates it.

SIPP holders can claim up to £85,000 back from the FSCS (Financial Services Compensation Scheme) if the UK-regulated investment provider fails.

If your pension plan is classed as a "contract of long-term insurance" - as is the case with most annuities – there's no cap on the compensation that may be awarded: the FSCS can cover 100% of the loss.

If you have a workplace pension and the provider fails, the FSCS will pay 100% of your claim with no upper limit.

The PPF (Pensions Protection Fund) steps in if a defined benefit scheme fails. This means that people already claiming their pension can continue to receive their promised payouts, while people yet to claim are offered up to 90% of their pension.

Every pension company found in our private pension comparison is regulated by the FCA (The Financial Conduct Authority).

If you can't get a workplace pension then a personal pension could be a good option. You can set the amount you pay in and also get tax relief on the your contributions. But where and how you invest your pension is a significant financial decision so it's important you take the time to do your research before making a commitment.

Private pension FAQs

How much can I pay into my pension?

As much as you like, but you might have to pay tax. The government rules say you can only pay in as much as your salary each year before attracting tax. If you earn over £60,000, anything over that amount will be taxed at your level of income tax. 

Even if you don’t have an income or earn below the income tax threshold, you still automatically get tax relief at 20% on the first £2,880 you pay into a pension each tax year.

There's currently no upper limit on what you can have saved up overall.

How much should I pay into a private pension?

The general advice for pensions is to contribute as much as you can as early as possible. A good rule of thumb is to take your age, halve it and contribute that percentage of your income into your pension to have a comfortable retirement.

So, if you're 30, you should contribute 15% of your income to your pension. Use pension calculators online to estimate how much your pot will be worth at different levels of saving. Think about how long that money needs to last, and try to increase contributions if you don’t think you’ll have enough.

What is a SIPP?

SIPP stands for Self Invested Personal Pension. With these, you have to manage and invest your fund yourself, rather than a fund manager doing it for you.

Do I need to use a financial adviser to set up a pension?

No, but you might want financial advice if you’re setting up a SIPP and choosing your own investments.

Is there a limit on my pension contributions?

There's no limit on how much money you can save into a private pension, but there are limits on the tax relief you can get.

What happens to your private pension when you die?

What happens to a private (or workplace defined contribution) pension when you die depends on two things: Your age and whether you've started taking money out already. Money in a drawdown pension is free of inheritance tax, but depending on the circumstances, the beneficiary may have to pay income tax on it.

  • If you're under 75 and haven't started drawing on the money, the pension can be passed on - income tax free - for the beneficiary to use themselves. Beneficiaries have two years after death to do this.

  • If you're under 75 but have started drawing on your pension, then any money you have taken out already will form part of your estate - so could be included in inheritance tax calculations. The money left in your pension fund will be passed on, free of inheritance and income tax, for your beneficiary to use as a pension.

  • If you're over 75, any money left in your fund will still be free from inheritance tax, but the beneficiary will pay income tax on it. If there's a lot of cash left in your pension, this could push them into a higher tax bracket.

  • If you've converted your private pension into an annuity, it is linked to your life - so payments usually end when you die. There are some exceptions to this, though - including joint-life, value-protected and guaranteed-term policies - so it's worth considering whether you want these benefits before choosing a provider.

Explore private pension and retirement guides

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About the author

James Andrews
James has spent the past 15 years writing and editing personal finance news, specialising in consumer rights, pensions, insurance, property and investments

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References

1. The Pensions Regulator: DC scheme return data 2022 to 2023
2. Government pensions statistics individual personal pension contributions from 2020 to 2021, up from £10.6 billion in 2019 to 2020.
3. UK Labour Market Statistics: Number of self-employed workers in the United Kingdom from May 1992 to December 2023