What is a private pension?
Thinking about how you'll fund your retirement when you stop working? Private pensions are one option to consider
Key takeaways
A private pension is a retirement savings plan separate from the state pension
Workplace and personal pensions offer tax benefits and help individuals save for retirement
Pension contributions receive tax relief, with an annual limit of £60,000 or 100% of earnings
From age 55, 25% can be taken from your private pension tax-free, with the rest subject to tax
What is a private pension?
The terms ‘private pensions’ or ‘personal pensions’ usually refer to pensions set up by an individual, rather than through an employer or workplace.
You can set up a private pension with a dedicated pension or investment provider and then make regular or lump-sum contributions.
How do private pensions work?
The idea of a private pension is that you’re saving to fund your retirement. They work as follows:
You select your pension provider and decide whether to opt for a plan where the investments and funds are chosen for you or you select them yourself.
The money you put into your pension pot is invested – typically in the stock market and a diversified range of other assets.
There will usually be annual fund management and other charges on your private pension.
You will automatically receive a 25% top-up from the government on the contributions you make, up to 100% of your annual income or the annual allowance of £60,000 (whichever is lower)
If the investment is successful, your money could grow over the long term which you’ll be able to access in later life.
When it comes to taking your pension, you have several options. You can usually take 25% as a tax-free lump sum once you turn 55 (rising to 57 from 2028). You can also decide whether to buy an income for life (annuity) or draw down your pension pot over a number of years.
What are the different types of private pensions?
There are several different types of pension with the two main types of private pensions being:
Types of pensions
Personal pensions
Set up through a pensions or investment company, you can make contributions into the pot as you wish, subject to certain maximum limits. You can usually choose how your money is invested, but typically personal pensions will invest in a range of stock market-linked funds as well as other assets.
In some cases, you can consolidate old private or workplace pension schemes into a new private pension if you decide this is the best option for you.
SIPP stands for self-invested personal pension. This is a type of private pension that gives you more autonomy over which assets to invest in. It’s often thought of as a tax-efficient wrapper within which you can save, invest and build up wealth for your retirement. Our guide to SIPPs explains more.
Workplace pensions
Workplace pensions are offered by employers and typically the employee and employer make set contributions, with the money invested in a range of assets.
The most common type of workplace pension scheme is money purchase (also known as defined contribution), where the amount paid out on retirement depends on the level of contributions and the investment’s performance.
Pensions linked to your final salary (also known as defined benefit) are rare now. They pay out a proportion of your salary and are typically very valuable to the employee, as they tend to be more generous – and more predictable – than money purchase schemes.
How can I set up a private pension?
We’ve teamed up with MoneyFarm to help you choose the right private pension plan. It’s quick and simple online:
Step 1: Sign up to the pension provider
You’ll be asked a few questions to understand your experience with investing and your appetite to risk to help you choose the right investments from across the market.
Step 2: Option to transfer existing pensions
You’ll have the option of transferring existing personal or old workplace pensions to consolidate your pensions into one pot, if you decide it’s in your best interests.
Step 3: Pay into your pension
You can set up regular payments through direct debit or deposit lump sum amounts into your pension pot.
Step 4: Watch your money working harder
You can monitor how your pension is performing and a dedicated pension adviser will be available to answer any questions you have.
It’s a good idea to take time to do your research first. You don’t need a financial adviser or broker to arrange a private pension. But getting expert and impartial advice is a good idea if you're not a confident or experienced investor – although this will come with an added cost.
What are the benefits of private pensions?
There are many advantages to starting a private pension, including:
Benefits of private pensions
Saving for retirement
The most obvious one is that it’s money that will help you when you reach an age where you stop working. Save a little regularly and this can add up over time.
Tax-relief
You will automatically receive a 25% top up from the government on any contributions you make, up to the annual limits. When you reach retirement age you can also take 25% of the pot tax-free.
Anyone can contribute
As well as any contributions you make, other people can also pay into your pension plan. In the same way if you have a spouse or children you’d like to help get started with private pensions, you can chip in for them.
Flexibility
Most private pensions are flexible and portable so if you move jobs or become self-employed you can continue contributing to the same plan. You’ll also have flexibility when it comes to deciding what to do with your pension pot – either taking some as a lump sum, leaving it to build further or taking an income (annuity) from it.
Will I get any tax relief on my pension?
Money saved into a personal pension is subject to tax relief up to a maximum permitted limit.
In England, pensions tax relief is paid at the highest rate of income tax that you pay, determined by your income. So either (basic rate) 20%, (higher rate) 40% or (additional rate) 45%.
This means that if basic rate taxpayers pay £80 into a pension it will be topped up to £100 through the tax relief (at 20%). Higher rate taxpayers would earn even more, but would need to claim with a self-assessment tax return. Non-taxpayers can still get the 20% tax relief.
In Scotland, income tax bands vary slightly and so the pension tax relief could be even higher.
There is a cap on pension tax relief, which currently stands at 100% of your income with a maximum of £60,000 of contributions per tax year. The lifetime allowance (LTA) was abolished on 6 April 2024. Consequently, there's no longer a limit on the amount you can accumulate in pension savings without facing an extra tax charge.
If you are unsure as to whether these rules apply to your contributions, you should seek professional advice.
When can I access my pension?
You can take the proceeds from a personal or private pension from age 55 (this is set to rise to 57 from 2028). The money can be taken as a lump sum (but only 25% can be taken tax free), or you can use the cash to buy an annuity – which will pay out a regular income for life.
Alternatively, you can keep your pensions pot invested to withdraw later or keep some invested while withdrawing a flexible income.
Is a private pension right for me?
It comes down to individual choice, but for many people a private pension that offers tax incentives to save for their retirement is a good decision.
Even a small amount put aside each month from an early age can make a big difference when it comes to retirement, particularly because the state pension is often not enough to cover people’s lifestyle in retirement.
Other useful guides
We have a range of guides to help with your pensions decision:
Compare private pensions with MoneySuperMarket
We’ve teamed up with MoneyFarm to help you choose the right private pension plan. They can help you track down and combine your old pensions if you decide it's in your best interests to do so and help you choose the best investment plan for you, using funds from the whole of the market. You will also get your own dedicated pension adviser to answer any questions you have.
When using the MoneyFarm Find, Check & Transfer service, a one-off arrangement fee of 1% of the pension value is charged when you transfer. All pensions found using this service will be checked for any existing benefits or penalties.
Capital at risk. Past performance is not a guide to future performance. This website does not constitute personal advice. If you are in doubt as to the suitability of an investment please speak to a financial adviser. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.
MoneySuperMarket.com Ltd is an Introducer Appointed Representative of MoneyFarm, which is authorised and regulated by the Financial Conduct Authority. FCA number 596398. Registered in England & Wales, Company Number 07731925. Registered office address: Norwest Court, Guildhall Street, Preston, PR1 3NU.
Frequently asked questions
How much should I save into my private pension?
How much you should save into a pension depends on when you plan to retire and what kind of lifestyle you plan to lead when you stop work.
While it’s not possible to be exact there are some rules of thumb, such as dividing the age you start paying into a pension by two and then saving that percentage of your salary every year. Our guide on how much you need to save for retirement should help further.
How do I choose the best pension plan?
The best pension plan will be different for different individuals, but there are a few common factors to consider.
Where you invest: The assets you invest in will be down to your view of risk and personal preference, such as ethical concerns
The size of charges: Know how much you’ll be paying in adviser fees and other charges, as these could erode the value of your pension pot
Having the right support: Make sure you’re happy with the way you can monitor your investment’s performance and make changes to your plan
What is pension auto-enrolment?
Pension auto-enrolment is a government initiative to make sure that companies provide pension opportunities for as many employees as possible.
Each company in the UK must provide a pension scheme that is more opt-out than opt-in. This means you’ll be automatically enrolled if you’re aged between 22 and state pension age and earn at least £10,000 per year. Our guide on workplace pensions explains more on auto-enrolment.
What are the private pension rules?
Pensions are one of the most highly regulated financial sectors, with specific rules governing what can and can’t be done with private pensions. A few examples include:
You can normally access your pension pot from age 55 (rising to 57 in 2028)
You can get tax relief on pension contributions up to £60,000 or 100% of your UK taxable earnings, whichever is lower
There is no lifetime allowance currently, as long as you didn’t start pension draw down before 6th April 2023
While your pension income is liable to be taxed, you can usually first take a tax-free 25% lump sum from your pension pot
Am I allowed to take out my pension early?
You can’t usually take your private pension before you reach age 55 or you may face heavy financial penalties. There are occasions where it may be possible though, such as if you are in poor health and can no longer work.
Author
Tim Heming
Personal Finance Expert
Tim Heming is a journalist and editor who has written about personal finance for national newspapers and consumer websites for 15 years. Tim enjoys providing no-nonsense information to help consumers...
Reviewer
Collette Shackleton
Content Writer
Collette Shackleton is a highly skilled Content Writer who has over nine years’ experience creating helpful and engaging personal finance content for consumers. Collette shares her experience as a...
