See what steps may help you
Written by Michael Foote, Insurance Expert
A private pension is a retirement savings plan you arrange yourself, separate from workplace pensions or the State Pension. You contribute regularly or as lump sums, and your money is invested in stocks, bonds, and other assets to grow over time. The goal is to build a pot you can access in retirement.
There are two main types: personal pensions and self-invested personal pensions (SIPPs). Both offer tax relief on contributions and flexible saving amounts, but they differ in control and investment choice.
Personal pensions
A personal pension is managed by a pension provider, typically an insurance company or investment firm. You choose how much to contribute, and the provider invests your money across pre-selected funds.
You can contribute any amount, but tax relief only applies to contributions up to 100% of your earnings or £60,000 per year, whichever is lower. Basic-rate taxpayers receive 20% tax relief automatically. Higher and additional-rate taxpayers can claim extra relief through Self Assessment.
Self-invested personal pensions (SIPPs)
SIPPs give you control over your investments. You choose where to invest your pension pot, selecting from shares, funds, bonds, and sometimes commercial property. This suits people who want to manage their own investments or work with a financial adviser to build a tailored portfolio.
SIPPs typically charge higher fees than personal pensions, particularly if you trade frequently or hold diverse assets. They work best for experienced investors or those willing to pay for professional advice.
How contributions and tax relief work
When you contribute to a private pension, the government adds tax relief at your basic rate automatically. A £80 contribution becomes £100 in your pension pot if you pay 20% income tax. Higher-rate taxpayers can claim an additional 20% through Self Assessment. Additional-rate taxpayers can claim another 5%.
The annual allowance is £60,000, though this reduces if you earn over £200,000 or have already started taking money from your pension. The lifetime allowance was removed in April 2024, though some older protections remain.
Our Expert, Michael Foote, Says:
“Most people underestimate how much control they have over their private pension. You are not locked into one provider or one set of investments. If your fees are high or your fund is underperforming, you can transfer to a better option. The earlier you start and the more you shop around, the bigger the difference to your retirement income.”
How your pension grows
Your pension provider invests your contributions in the market. Over decades, compound growth can significantly increase your pot’s value, though all investments carry risk. Younger savers typically hold higher-risk funds with more equity exposure, while those closer to retirement shift into lower-risk assets like bonds.
Most providers offer different fund options based on your risk tolerance and retirement timeline. You can usually switch funds without penalty, though you should review your choices every few years or when your circumstances change.
When you can access your private pension
You can start taking money from your private pension at age 55 (rising to 57 in 2028). Your options include:
- Take up to 25% as a tax-free lump sum
- Draw income regularly through flexi-access drawdown
- Buy an annuity for guaranteed income
- Combine methods
Once you take your first withdrawal, you may trigger the Money Purchase Annual Allowance, which limits future pension contributions to £10,000 per year. This applies even if you only take the tax-free portion, depending on how you structure the withdrawal.
If you are considering taking a lump sum, you can read more about whether it is the right choice for you.
Fees and charges
Private pensions charge annual management fees, typically between 0.2% and 1% of your pot each year. Low-cost index funds are usually cheaper than actively managed funds. Some providers also charge platform fees, trading fees, or exit fees if you transfer elsewhere.
Over time, small fee differences compound significantly. A 1% annual fee on a £100,000 pot costs around £1,000 per year, increasing as your pot grows.
Transferring or consolidating pensions
If you have multiple old pensions from different jobs, consolidating them into one private pension can simplify management and reduce fees. Check for exit penalties, guaranteed annuity rates, or protected tax-free cash before moving.
Some older pensions offer valuable benefits you will lose on transfer. Always check with your provider or a financial adviser before proceeding.
What happens if you die
If you die before age 75, your pension can usually pass to your beneficiaries tax-free. After 75, it is taxed as income at their marginal rate. This makes pensions a tax-efficient way to pass on wealth compared to other savings that may be subject to inheritance tax.
You nominate beneficiaries through an expression of wish form. The pension provider has discretion over who receives the money but will usually follow your wishes unless there is a strong reason not to.
Common mistakes to avoid
- Not reviewing your pension regularly
- Paying high fees without realising
- Ignoring contribution limits and losing tax relief
- Taking money out too early and running out later
- Failing to nominate beneficiaries
FAQs
Can I have more than one private pension?
Yes. You can contribute to multiple private pensions, but your total contributions across all schemes must stay within the £60,000 annual allowance to qualify for tax relief.
What is the difference between a private pension and a workplace pension?
A workplace pension is set up by your employer, and they contribute to it. A private pension is one you arrange yourself. You can have both.
Do I have to take my pension at 55?
No. You can leave it invested and access it whenever you like. The longer you leave it, the more time it has to grow.
Can I withdraw all my pension in one go?
Yes, though only 25% will be tax-free. The rest is taxed as income, which could push you into a higher tax bracket.
What happens if my pension provider goes bust?
Your pension is protected by the Financial Services Compensation Scheme (FSCS) up to 100% of its value, with no upper limit.
Can I still contribute if I am not working?
Yes. You can contribute up to £2,880 per year (topped up to £3,600 with tax relief) even if you have no earnings.
Is a SIPP better than a personal pension?
It depends on your investment knowledge and willingness to manage your own portfolio. SIPPs offer more control but require more responsibility and often charge higher fees.
Can I transfer my workplace pension into a private pension?
Usually, yes. Check for exit fees or lost benefits before transferring.
How much should I be saving into a private pension?
A common rule is to save half your age as a percentage of your salary. If you are 30, aim for 15% including employer contributions and tax relief. You can also explore how much you need to retire comfortably.
Do private pensions count towards inheritance tax?
No. Pensions sit outside your estate and are not subject to inheritance tax, though they may be taxed as income depending on when you die.
Get your pension questions answered today
If you are unsure how much you should be saving or which pension suits your needs, speaking to a financial adviser can help you make informed decisions tailored to your situation. Use the quote button below to compare advisers and get started today.