Personal pensions may be suitable if you're employed and not in a company pension scheme, or as an addition to a company pension. You may also wish to set up a personal pension if you are self-employed or if you are not working but can afford to put aside money for retirement.
You pay a regular amount (usually monthly or annually), or a lump sum to the pension provider who will invest it on your behalf.
Funds are usually run by financial organisations like insurance companies and unit trust companies.
The final value of your pension fund will depend on how much you have contributed and how well the fund's investments have performed. The companies that run these pensions charge you for starting up and running your pension. Charges are normally deducted from your fund in the form of fund management charges.
Contribution Levels and Tax Relief
The standard pension annual allowance is £60,000 for 2026/27. It includes contributions from you, your employer and other parties, together with pension growth assessed under defined benefit scheme rules.
Personal pension contributions can qualify for tax relief, subject to the relevant earnings and contribution limits. The relief depends on your circumstances and tax rate. Scottish Income Tax rates differ.
The Tapered Annual Allowance (TAA) came into force as of 6 April 2016 for high earners.
The tapered annual allowance applies when both threshold income exceeds £200,000 and adjusted income exceeds £260,000. These are specific tax calculations, not simply your salary.
The allowance reduces by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000 when adjusted income reaches £360,000 or more.
A separate money purchase annual allowance may apply after you flexibly access a defined contribution pension. This is £10,000 for 2026/27.
If your income changes, the tapered annual allowance must be assessed again for the relevant tax year. Carry-forward rules may help with unused allowance, but cannot increase the money purchase annual allowance.
If total contributions exceed the annual allowance the excess is added to the individual's income and taxed accordingly. The tax can either be paid by the individual or in some cases can be paid by a deduction from the pension plan (known as 'scheme pays').
For 2026/27, unused annual allowance may be carried forward from 2023/24, 2024/25 and 2025/26. You must have been a member of a registered pension scheme in the relevant earlier year. The amount available depends on your unused allowances and circumstances; tax relief on personal contributions is also subject to earnings limits.
If you wish to carry forward unused annual allowance from previous tax years, you will need to have used up the annual allowance for the current year.
For each pound you contribute to your scheme, the pension provider claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot.
Higher-rate Taxpayers
If you're subject to the higher tax rate of 40 per cent (up to 45% for additional rate taxpayers), you'll still get 40% or 45% per cent tax relief for any money you put into your pension that is matched by income in the higher or additional rate tax bands. But the way that the money is given back to you is different:
- You pay your contributions after deducting 20% tax relief and this 20 per cent tax relief is claimed back from HMRC by your pension scheme and added to your plan
- It's up to you to claim back the other 20 per cent if you're a higher rate tax payer or 25 per cent if you're an additional rate tax payer on some or all of the contributions when you fill in your annual tax return (higher or additional rate), or by contacting your Tax Office (higher rate only). This tax relief is given to you rather than being added to your pension plan.
- Your pension fund will invest the money you save (including the basic rate tax relief amount) in your pension. Your pension fund will benefit from growth and income from its investments and these accumulate free from tax.
Drawing your Personal Pension
You can normally take up to 25% of pension savings as tax-free cash, subject to your available lump sum allowance. The standard lump sum allowance is £268,275 across your pensions, although protections or earlier benefits can affect it. The lifetime allowance was abolished from 6 April 2024. The normal minimum pension age is currently 55 and generally rises to 57 from 6 April 2028, with exceptions including some protected pension ages and ill health.
You then have two main options:
- Use the rest of the fund you have built up to buy an annuity (a regular taxable income payable for life) from a life insurance company. This does not have to be the same company that you have your pension plan with.
- Take a regular or ad hoc income (taxed at your normal Income Tax rate) from the remainder of your fund while it remains invested (known as flexi-access drawdown).
Depending on the scheme rules, you may also be able to take individual lump sums without moving the remaining pension into flexi-access drawdown. Normally 25% of each payment is tax free, subject to available allowances, and the rest is taxable. Taking taxable flexible benefits can trigger the money purchase annual allowance.
Putting Money into Someone Else's Personal Pension
You can put money into someone else's personal pension (eg. your spouse/partner, child etc). You will pay the net amount after deducting 20% tax relief and the pension plan member has tax relief added to their plan at the basic rate. You can’t claim any additional tax relief on your contributions though as the contributions are classed as having been made by the pension plan member (so if they were higher or additional rate taxpayers they could claim some tax back). If they have no earned income, you can pay in up to £2,880 a year (which becomes £3,600 with tax relief).For example, if you put £80 into a spouse or civil partner's pension scheme, the government would put in £20, so their pension pot would increase to £100. Your tax would remain the same.