How to choose a private pension that’s right for you

What is a pension?

A pension is a savings tool designed to provide you with income when you retire. There’s the State Pension provided by the government that most people in the UK will be able to get, and then there are a wide range of private pension options, ranging from workplace pensions provided by employers, to SIPPs, stakeholder pensions, and personal pensions that you can arrange yourself.

Each type of pension works differently and offers its own advantages, making it important to understand your options before making any decisions.

What are the different types of pensions available?

In the UK pensions can be broken down into:

• State Pensions
• Private pensions

Private pensions are any types of pensions that aren’t provided by the government (ie the ‘state’), and they can be further broken down into a number of different types:

• Self-Invested Personal Pensions (SIPPs)
• Stakeholder pensions
• Workplace pensions

It’s also possible to categorise private pensions based on whether they are either:

• Defined Contribution (DC)
• Defined Benefit (DB)

SIPPs and stakeholder pensions are always Defined Contribution pensions, but workplace pensions can be either DC or DB pensions.

Below is an in-depth view: 

State Pension

The State Pension provides a basic level of retirement income for UK residents who have made sufficient National Insurance contributions during their working lives.

What are the advantages of a State pension?

The State Pension offers pensioners a guaranteed income for life once they reach State Pension age. The amount can vary depending on national insurance contributions, but the full rate of the new State Pension is currently £230.25 a week (£11,973 a year). This income is backed by the government and includes annual increases through the triple lock, which raises payments by the highest of inflation, wage growth, or 2.5%.

The pension continues regardless of how long you live, and since your State Pension entitlement is based on your National Insurance record you don't need to make investment decisions or worry about market performance.

What are the disadvantages of a State pension?

The full new State Pension is a fairly modest amount, which means it’s unlikely to cover most people’s income requirements during retirement - you’ll probably need to supplement it with some type of private pension provision.

It’s also important to note that you’ll need at least 10 qualifying years of National Insurance contributions in order to receive any State Pension, and 35 qualifying years for the full amount, meaning any gaps in your contributions (for example, due to periods of unemployment, caring responsibilities, or living abroad) can reduce your entitlement.

The state pension age is gradually increasing and may continue to rise, potentially affecting when you can access this income, so if your retirement is still far off that’s something to be mindful of too.

Self-Invested Personal Pensions (SIPPs)

SIPPs allow you to choose from a very wide range of investments, including individual shares, bonds, funds, commercial property, and other alternative investments.

What are the advantages of a SIPP?

SIPPS offer several advantages if you are looking to take control of your retirement savings:

• Investment control: SIPPS allow you to choose from a wide range of investment options yourself, providing you with a lot of flexibility and control. If you have experience with investing or are interested in the financial markets, this could be advantageous. In most cases SIPPs also give you control over the timing of investments, allowing you to respond to market opportunities or adjust your strategy as circumstances change.
• Tax relief on contributions: As with all private pensions, SIPPs offer pension holder tax relief on their contributions. Your SIPP provider will automatically claim the 20% tax relief for you, but if you’re in a higher tax bracket you can also submit a self assessment tax return in order to claim the additional tax relief.
• Tax free growth: If the investments in your SIPP perform well and the money you contributed grows in value you won’t be liable for tax on those gains, which means you can benefit from tax free growth within your pension.
• Flexible access from the age of 55 (rising to 57 in 2028): SIPPs are Defined Contribution pensions, which means they offer flexible access to your pension pot from the age of 55 (although this minimum age for access is due to rise to 57 in 2028.
• Inheritance planning benefits: SIPPs are not currently subject to inheritance tax, although if you’re over the age of 75 when you die your beneficiaries might have to pay income tax.
• Pension consolidation: If you have multiple small Defined Contribution pension pots it’s possible to consolidate all of those sums into one standalone SIPP, which could make it easier to manage and track your retirement income.
• Access to commercial property: Some SIPPs allow pension holders to hold commercial property within their SIPP, which might be an attractive option for landlords or commercial property investors who are planning for retirement.

What are the disadvantages of a SIPP?

SIPPs can be great, but are not the right fit for everyone. Features some may consider a disadvantage include:

• A need for prior investment knowledge: SIPPs’ strengths can also be their weakness - because the pension holder is choosing all of the investments themselves, these pensions require investment knowledge and a hands-on approach to decision making. Poor investment decisions can put a severe dent in a SIPP, and there’s a risk of over-trading as well as unnecessary risk taking.
• The need for ongoing monitoring: SIPPs require regular management and oversight. You’ll need to review performance and ensure you remain within the contribution limits.
• Higher costs: SIPPs often have higher fees than standard pensions, especially if you are buying individual stocks, investing in commercial property or even working with an advisor. This can have a particularly big impact on a pension’s returns if the pension pot isn’t very big.
• Pension is locked away till the age of 55 (57 from 2028): This isn’t unique to SIPPs, however it is something you need to be aware of when deciding how to invest your capital and if you think you may need it sooner.

Who are SIPPs best for?

Self-Invested Personal Pensions tend to appeal to people who have prior investment experience or an active interest in studying the financial markets. This type of pension gives these pension holders the flexibility to choose their own investments and design their own retirement portfolio.

SIPPs can sometimes have higher fees than stakeholder pensions and some types of standard pensions, although a lot will depend on the types of investments the pensionholder chooses to invest in. Some types of investments will incur higher charges, while others might actually be cheaper than the capped 1% to 1.5% fees you’d pay for a stakeholder pension.

Stakeholder Pensions

Stakeholder pensions were created to encourage more people to save for retirement, and with that in mind they’ve been designed to offer accessible, cost effective personal pensions with capped fee structures and flexible contributions.

What are the advantages of Stakeholder Pensions?

• Capped fees: Fees are capped at 1.5% for the first ten years, and then 1% after that. This ensures that high fees don’t erode your retirement savings over time, which is a particularly important consideration for people with smaller pension pots.
• Low and flexible contributions: Stakeholder pensions are extremely flexible, with contributions as low as £20 and the ability to increase, decrease, stop, and start contributions whenever you want. This makes them useful for people with irregular or unpredictable incomes.
• b Stakeholder pensions offer savers tax relief on their contributions, with the basic 20% tax relief automatically claimed by the pension provider on your behalf. If you’re in a higher tax bracket then you can claim the additional tax relief by filing a self assessment.
• Pension consolidation: If you have more than one private pension you should be able to consolidate them all into one in order to make them easier to manage.
• Flexible access from the age of 55 (rising to 57 in 2028): As with other private pensions, stakeholder pensions can be accessed from the age of 55.
• Employer-friendly: Many small businesses use stakeholder pensions to meet their legal duty to provide access to a pension scheme as they can contribute to a stakeholder pension if they don’t offer a workplace scheme.

What are the disadvantages of Stakeholder Pensions?

One disadvantage of stakeholder pensions, particularly compared to SIPPs, is that they have more limited investment options. People with stakeholder pensions may be able to choose between a small selection of funds, but they won’t have access to the broad range of investment options that SIPPs offer.

Of course, this disadvantage can also be seen as an advantage, because the available funds are by definition more diversified (and therefore potentially less risky) than investing in individual shares.

The capped charges can sometimes be a double-edged sword too,  because they can encourage some stakeholder pension providers to offer fewer features or services to their pension holders in order to cut cuts.

Who are stakeholder pensions best for?

Stakeholder pensions were created in order to encourage more people to save for their retirement, and their flexibility, capped fees and simplified investment options make them particularly suitable for people who were less likely to open private pensions in the past. This includes self-employed people, anyone who has an unstable or unpredictable income, and people on lower incomes.

Workplace pensions

Workplace pensions are provided by employers and are the most common type of private pension in the UK, with the introduction of auto-enrolment making them even more common.

What are the advantages of a workplace pension?

The biggest advantage of a workplace pension is your employer’s contributions to your pension pot. Employers have to contribute at least 3%, but many contribute more than that.

Another advantage is that they often have low charges due to economies of scale, and government legislation also caps these charges at 0.75% a year.

Auto-enrolment can also be seen as an advantage, because before it was introduced millions of employees in the UK didn’t have any private pension provision.

What are the disadvantages of a workplace pension?

The biggest disadvantage of a workplace pension is that you’re dependent on your employer's choice of provider, investment options, and scheme features. If your employer makes changes, it could potentially affect your pension planning.

If you change jobs frequently, there’s also the issue of multiple small pension pots that can become cumbersome to manage - and you could even misplace or forget about some of them in the future.

Who are workplace pensions best for?

Any UK employee who meets the following minimum criteria will be automatically enrolled into a workplace pension:

• Employed in the UK on either a full-time or part-time basis
• At least 22 years old and under the State Pension age
• Earning at least £10,000 a year.

While employees can choose to opt out of a workplace pension, that’s rarely a good decision because they would be forfeiting their employer’s pension contributions, which equates to at least 3% of their salary every year.

Defined Benefit (DB) Pensions

Defined benefit pensions offer a guaranteed level of retirement income based on your salary and years of service, though they're now rare in the private sector.

What are the advantages of a Defined Benefits Pension

The biggest advantage DB pensions offer pension holders is that they provide a guaranteed income for life, calculated using a formula that takes into account the individual’s years of service and salary. This removes investment risk and provides certainty about retirement income regardless of market conditions.

Another advantage is that Defined Benefit pensions often include other valuable benefits like inflation protection through annual increases, survivor pensions for spouses, and death-in-service benefits.

What are the disadvantages of a Defined Benefits Pension

DB pensions offer limited flexibility compared to DC alternatives. In many cases you might not be able to adjust contribution levels or access funds early.

Still, DB pensions are often seen as the ‘gold standard’ of private pension provision, so the biggest downside is that most private sector DB schemes are now closed to new members, making them unavailable to most workers.

Defined Contribution (DC) Pensions

Defined Contribution pensions, which include most workplace pensions and all SIPPs and stakeholder pensions, work by establishing a pension pot that you (and potentially others) contribute money to, and those contributions are then invested in an effort to grow the size of your pot over time.

What are the advantages of a Defined Contribution (DC) Pension?

One advantage of DC pensions is that they often offer quite a lot of flexibility. Some of them give you flexibility when it comes to how and when you contribute (and how much), some of them let you choose your own investments, and all of them give you flexible access to your pension funds when you retire.

At present, DC pensions also offer excellent inheritance planning opportunities, with inherited pensions often benefiting from more favourable inheritance tax rules than many other types of assets. However, this is due to change in April 2027, when new legislation will see these pensions included as part of a deceased person’s estate for inheritance tax purposes.

What are the disadvantages of Defined Contribution (DC) Pensions?

The biggest disadvantage of a Defined Contribution pension when compared to a Defined Benefit one is that it doesn't offer any guarantees about your retirement income. With a DC pension the amount of retirement income you receive will be entirely dependent on how much has been contributed, the performance of the investments, and market conditions when you retire. Poor performance can significantly reduce your retirement prospects with this type of pension compared to a DB one.

Your retirement income also isn't guaranteed to last for life when you have a DC pension that is being used to drawdown income from. If you live longer than expected or withdraw particularly large lump sums it is possible to completely exhaust this type of pension.

What should you consider when you are choosing a pension?

There’s a lot to consider when you’re choosing a pension, including the pension’s investment options, your attitude to risk when it comes to investments, a pension’s rules around contributions, and the fees a pension scheme charges.

What are the different pension investment options?

Stakeholder pensions and standard personal pensions will often only allow you to choose from a range of specified investment funds, and some workplace pensions might offer the same limited range of investment options while others might give you a broader range to choose from.

On the other hand, SIPPs provide pensionholders with the widest and most diverse range of investment options, including:

• Stocks
• Bonds
• Investment funds
• Unit trusts
• Property
• Commodities

What is your risk tolerance?

Understanding your level of risk tolerance can help when choosing a pension, because if you’re more risk averse you might be less inclined to favour a SIPP that allows you to invest in individual stocks and shares as well as commodities and property.

Individual stocks and shares are generally more volatile than funds that include a diversified portfolio of shares, while commodities are also more volatile too, which means investors would need a higher degree of risk appetite to choose these investments.

People with less risk appetite are likely to be more inclined to choose a stakeholder pension or a standard personal pension, rather than a SIPP.

How can you reduce your risk?

The key to reducing your level of risk exposure is to aim for a pension that has:

• Diversification: A diversified portfolio of investments that spans different asset classes and geographic regions
• Age-based risk management: An investment strategy that reduces the riskiness of its investments as you move closer to retirement.

Risk v reward - finding what’s right for you?

How can you assess investment performance?

The key to assessing a pension’s investment performance is understanding which metrics to focus on, as well as the difference between short-term and long-term performance.

• Fund performance metrics: This includes the fund’s annual returns, but can also include its risk-adjusted returns, which take into account how risky the fund’s investments are and show how much return you're receiving for that level of risk.
• Long-term vs short-term performance: When you’re assessing your pension’s investment performance it’s important to understand that periods of market volatility can cause poor performance when measured on a short-term basis. Since pensions are long-term savings tools, and diversified portfolios usually perform better over longer periods, it’s usually better to consider your pension’s long-term performance rather than worrying about short-term movements.

Consider the pension provider’s reputation and stability

In addition to investment options and fee structures, you might also want to consider a pension provider’s reputation and the strength of their business before you make a decision.

Customer reviews on sites like Trustpilot or Reviews.co.uk can provide insights into a pension provider’s customer service, responsiveness to queries, and how well they handle complaints.

When it comes to their stability, it’s important to double check that the pension provider is authorised and regulated by the FCA, and you might also want to consider factors like how long they’ve been operating, how many people they employ, and how many customers they serve.

Fees and charges

The fees you pay for your pension can have a significant impact on your pension pot, particularly if a provider’s fees are higher than normal or your pension pot is fairly small.

Common Pension Fees

• Annual management fees: can range from as low as 0.2% a year for low-cost workplace pension schemes, up to as much as 1% or 1.5% a year for some SIPPs.
• Transaction fees: may apply when buying or selling investments. With workplace pensions, stakeholder pensions and standard personal pensions these fees are sometimes included in the annual management fee (although it’s important to double check this), but if you have a SIPP you’ll almost always be charged separate fees any time you buy or sell an investment, and these fees be as high as £25 per transaction for some SIPPs.
• Fund manager fees: are fees that might be levied when a fund manager manages an investment fund your pension is invested in. These fees are sometimes listed as a separate charge from annual management fees, while other providers might build them into their annual fee.
• Exit fees: might be charged if you’re transferring your pension to another provider, although many providers no longer levy these charges.

Comparing fees between different providers

Pension providers have to provide a fee disclosure document before you open a pension with them, but even before you reach that stage in the process it’s usually possible to compare the range of fees each provider charges through an online pension comparison tool.

Impact of fees on long-term returns

While a 1% or 1.5% fee might not seem like a lot, when this is levied against a large pension pot it can soon add up, particularly since pensions are long-term savings products and those fees will be charged year after year.

For instance, if you had a pension pot of £100,000 and your pension provider charged annual fees of 1% then you’d pay £1,000 a year. If you held that pension for 10 years (and assuming for simplicity that your investments neither rose nor fell in value during that time) then 10% of your retirement income would go on fees.

What is your projected retirement income?

As the name suggests, the projected retirement income for a Defined Contributions pension is an estimate rather than a guaranteed amount, but it’s still a useful way to gauge how much you might have in retirement.

What will your future pension income be, based on contributions and growth?

Many pension providers offer calculators that are designed to estimate your future retirement income based on your current contribution levels and assumed investment growth. These projections are obviously imprecise because no one knows how investments will actually perform, but they can help you understand whether you're on track to meet your financial needs in retirement.

It’s a good idea to explore different scenarios using these calculators, such as how your pension pot might be affected if you increase or decrease your contributions, how the riskiness of your pension’s investments could affect your final amount, and the role the age at which you retire can play in your plans for retirement income.

How does inflation impact your pension?

In a nutshell, the investments in your pension need to grow faster than inflation otherwise the value of your pension pot will fall in real terms (in other words, your money will have lower purchasing power in the future even if the actual monetary amount doesn’t fall).

There are some types of investments that can help offset the impact of inflation, such as gold, some other commodities and real estate, but it might be a good idea to speak to a financial adviser if you’re considering choosing your investments yourself.

What are the tax implications for your pension?

Pensions are highly advantageous when it comes to taxation, but that doesn’t mean they don’t have any tax implications at all.

Tax relief on contributions is a major advantage over many other types of savings products, with the government effectively topping up your pension contributions through tax relief. Basic rate taxpayers usually receive 20% tax relief automatically, while higher-rate taxpayers can claim additional relief by completing a self-assessment.

However, it’s important to bear in mind that there is an Annual Allowance that limits how much you can contribute each year while still benefitting from tax relief. For most people this limit is set at £60,000 or 100% of your annual salary, whichever is lower.

Income tax applies to pension withdrawals, although the first 25% of your pension pot can be taken tax-free (up to a maximum of £268,275, which is the maximum tax-free lump sum). For the remaining 75% of your pot you’ll pay income tax at your marginal rate. Since most people have a lower income after they retire than they did when they were working, this income tax arrangement is advantageous as well.

When and how will you be able to access your pension funds?

Each pension scheme will have its own rules about when and how you can access your pension, so it’s important to consider those details when you’re choosing a pension.

Defined Benefit pensions will pay you a regular monthly income after you retire. If your pension is a Defined Contribution then the pension freedoms that were introduced in 2015 means you’ll be able to configure the nature of your withdrawals yourself.

Those pension freedoms mean you’ll be able to access your pension from the age of 55 (rising to 57 in 2028), and you can choose whether to access the pot by taking lump sums, using a drawdown approach, buying an annuity, or any combination of those options.

What are the terms and conditions?

Opening a new pension means agreeing to your provider’s terms and conditions, so it’s important to read the fine print before you sign on that dotted line.

These terms and conditions will cover things like the minimum contribution amounts, the pension’s fee structure (and when those fees are levied), rules about your investment options and how you choose, and how you can transfer your pension (including any exit fees that might apply if you’re transferring out).

The T&Cs will also cover things like how and when you can access your pension, and what happens to your pension when you die, so it’s important to review these documents in order to find a pension that fits your own needs.