Personal and private pensions: The complete guide

What are personal and private pensions? 

In the UK, any pension that isn't the State Pension is classed as a private pension. This includes workplace pensions, SIPPs, stakeholder pensions, and personal pensions.  

While the terms are often used interchangeably, private pensions and personal pensions aren’t exactly the same thing. Personal pensions are a specific type of private pension that you arrange yourself, which means all personal pensions are private pensions, but not all private pensions are personal ones. 

What is the main purpose of a personal pension? 

Unlike a workplace pension, which will see you enrolled into the pension scheme chosen by your employer, a personal pension gives you control over investment decisions and contribution amounts.  

They’re a useful way to supplement your State Pension, and are a popular choice with people who are self-employed and therefore don’t have access to a workplace pension. 

However, if you have a job and are enrolled in your employer’s workplace pension you can still have a personal pension as well, and some people do decide to have both because it gives them more flexibility. 

How do personal pensions differ from workplace pensions? 

While both personal pensions and workplace pensions are types of private pensions, they differ in several key ways: 

• Employer contributions: With a workplace pension your employer will have to contribute at least 3% of your salary to your pension, whereas personal pensions are entirely dependent on your own contributions (and the amount you decide to contribute might rise or fall over time depending on your finances). 

• Your own contributions: While your employer is required to contribute 3% to your workplace pension, there’s also a minimum on your own contributions too  - if you’re auto-enrolled in your employer’s workplace pension scheme you’ll have to contribute at least 5% of your annual salary to it. With personal pensions, on the other hand, there’s no minimum contribution amount and you can change it whenever you like.  

• Provider selection: With personal pensions, you choose the pension provider yourself, whereas your employer chooses the provider when it’s a workplace pension scheme.  

• Cost: Personal pensions sometimes have higher charges than workplace schemes because they aren’t able to benefit from the economies of scale that employer-arranged schemes might offer.  

Who are personal pensions for? 

Personal pensions can be a useful retirement planning tool for many different types of people, from those without access to a workplace pension, to high earners looking to maximise their tax-efficient savings. 

Self-employed individuals 

Self-employed people don't have access to workplace pensions, which means a personal pension will often be the go-to choice for freelancers and sole traders who want to grow a pension pot beyond their State Pension.  

Because personal pensions are usually very flexible they can be a useful option if someone’s self-employed income fluctuates substantially from month to month, enabling them to change their contribution amounts in line with these income fluctuations.  

People without a workplace pension 

Some employees don't have access to workplace pensions, usually because they earn less than £10,000 a year, which is the minimum income for auto-enrolment.  

If an employee isn’t enrolled in their employer’s workplace pension then they can choose to open their own personal pension plan to supplement their State Pension. 

Those who want to top up retirement savings 

Personal pensions allow you to save additional money for retirement over and above your workplace pension, which means they might be suitable if you believe your workplace pension and State Pension won’t be enough to meet your retirement needs. 

This might be particularly relevant if you started saving a little late for your retirement.  

High earners looking to maximise allowances 

If you’re a high earner you might decide to have a personal pension alongside your workplace pension in order to maximise your tax relief. This could be a particularly suitable option if some of your income is earned through consulting, side business or non-executive directorships outside your primary job. 

Anyone wanting more control and flexibility 

Personal pensions do give you more control and flexibility than a workplace pension, because they allow you to choose the provider and the contribution amount, and many also give you some say over how the pension contributions are invested. 

However, it’s rarely a good idea to opt out of the workplace pension entirely, because you would then be giving up your entitlement to employer contributions. It would make more sense to have a personal pension that you manage alongside your workplace pension.  

Is it worth getting a personal pension? 

While every pension holder will need to weigh things up for themselves and their own personal circumstances, paying into a personal pension does offer a range of tax benefits.  

Tax relief 

The government essentially tops up your personal pension contributions through tax relief. Basic rate taxpayers receive 20% tax relief, meaning an £80 contribution becomes £100 in your pension pot. Higher rate taxpayers can claim additional relief, although they would claim the extra via self-assessment.  

Tax-free growth 

If the value of your pension’s investments increase in value, then the money in your personal pension is able to grow free from income tax and capital gains tax. 

Inheritance tax benefits 

Personal pensions are currently considered to be outside your estate for inheritance tax purposes, which means if you were to die your spouse or dependents wouldn’t face an inheritance tax liability on your pension (although they might still be liable for income tax if the size of your pension pot was higher than the lump sum and death benefit allowance, or if you were over the age of 75 when you died).  

However, personal pensions aren't the best option for everyone, particularly on a standalone basis. If you have access to a workplace pension with employer contributions, it’s usually best to maximise those benefits first before considering additional contributions to a personal pension. 

Types of personal and private pensions 

Personal pensions are just one of the many types of private pensions that can be opened and managed independently of an employer. It’s worth understanding all the different types in order to figure out what’s right for you.  

Self-Invested Personal Pensions (SIPPs) 

SIPPs are one of the most flexible types of private pensions, allowing you to choose from a very wide range of investments and take direct control over your retirement portfolio. They're designed for experienced investors or those with a lot of interest in financial markets.  

Wider investment choices set SIPPs apart from other types of private pensions, including personal pensions. While standard personal pensions do allow pension holders to choose between a range of funds, SIPPs can provide access to thousands (or in some cases even tens of thousands) of investments, including individual shares, government and corporate bonds, investment trusts, ETFs, and even commercial property.  

But it’s important to bear in mind that fees for SIPPs can be higher than other private and personal pensions, so that needs to be factored in when you’re weighing up your options. 

Standard Personal Pensions 

Standard personal pensions are offered by banks, insurance companies, and specialist pension providers. They represent the traditional approach to personal pension provision and remain popular because they’re straightforward and offer professional investment management. 

These pensions typically come with a default investment fund that's designed to suit most savers, often using a ‘lifestyle’ approach that automatically adjusts risk as you approach retirement. Some may also give you access to a range of other funds covering different asset classes, geographic regions, and investment styles, though the choice is much more limited than it is with SIPPs. 

Fees and charges for standard personal pensions can vary quite a bit, but are usually cheaper than you’d pay for a SIPP.  

Stakeholder Pensions 

Stakeholder pensions were introduced by the British government to encourage more people to save for retirement beyond their State Pension, and they did this by providing a flexible, accessible and relatively low-cost pension plan for people who might otherwise struggle to access good pension provision.  

They’re still a suitable option for many savers, particularly those with lower incomes or irregular earning patterns, although some newer types of pensions do now offer lower fee structures.  

Stakeholder pensions have capped charges, which means they’re cheaper than some other types of pensions, although the cap was set in 2001, at a time when pensions generally charged higher fees across the board. Since then some personal pensions and SIPPs have been launched with much lower fees, which is one of the reasons stakeholder pensions have increasingly fallen out of favour.  

Group Personal Pensions (GPPs) 

Group Personal Pensions are a bit unusual, because although these pensions are arranged by employers they’re managed by the pension holders - that’s why they’re simultaneously a ‘group’ and a ‘personal’ type of pension.  

GPPs became popular when many employers wanted to move away from Defined Benefit pensions in the 1980s and 1990s, and they offer a greater degree of portability than most regular workplace pensions. 

How do private pensions work? 

The vast majority of private pensions are Defined Contribution schemes, where the amount of money they pay you in retirement will depend on the amount contributed, as well as how your investments have performed, and how you access your benefits. 

Contributions:  

The minimum contribution varies between providers and pension types - many stakeholder pensions accept very low contribution amounts (often £20 or even lower), while some SIPPs might have larger minimums.  

Workplace pensions are a little different because your contribution amount is based on your salary, with employees usually required to contribute 5% and employers 3%. 

You can contribute up to 100% of your annual earnings or the Annual Allowance, whichever is lower. The Annual Allowance is currently £60,000 for most people unless you’re on a very high income. 

Tax Relief:  

Most personal pensions use the ‘relief at source’ approach to tax relief, where you pay contributions from income that's already been taxed and then your pension provider claims back basic-rate tax relief and adds it to your pension pot.  

The one exception is a workplace pension, where your pension contributions will often be deducted from your salary before tax is calculated. 

If you're a higher-rate taxpayer (paying 40% tax) or additional-rate taxpayer (45%), you can claim additional tax relief through a self assessment. This makes personal pensions extremely tax-efficient for higher earners – a £600 net contribution can result in £1,000 going into your pension pot. 

Growth Over Time:  

Since most private pensions are Defined Contribution they depend on investment growth to supplement your contributions, The money from these investments grows free from income tax and capital gains tax, allowing compounding to have an impact on your pension pot.  

Of course, the value of investments can fall as well as rise, and if your private pension is a DC one then your pension pot will fluctuate with market conditions. This is why most experts recommend starting saving for retirement as early as possible, and maintaining contributions through market ups and downs to benefit from long-term trends. 

Retirement Pot:  

By the time you reach retirement you'll have built up a pot of money in your Defined Contributions pension that you can access under the pension freedoms rules introduced in 2015. These rules give you a lot of choice over how to use your pension savings. 

You can take 25% of your pot as a tax-free lump sum, with the remainder taxable when you withdraw it. You might choose to keep your money invested while taking income through a process known as ‘drawdown’, you might decide to buy an annuity for guaranteed income, or you might take larger lump sums for specific purposes, or a combination of these approaches. 

Comparing Net Pay vs. Relief at Source 

Most personal pensions, SIPPs, and stakeholder pensions use relief at source, where you make contributions from income that's already been taxed and then your pension provider claims basic-rate tax relief from HMRC and adds it to your pension. This system works well for basic rate taxpayers, but higher rate taxpayers need to claim additional relief through self-assessment. 

Workplace pensions often use net pay arrangements, where contributions are deducted before tax is calculated, giving immediate tax relief. This method can be more efficient for higher rate taxpayers because they won’t have to file a self assessment each year. 

What are the benefits of private pensions? 

Personal pensions offer several advantages that make them valuable components of retirement planning, particularly for people seeking control and flexibility over their savings. 

Flexibility 

While workplace pensions will have limitations in terms of choosing the provider and the investments, most other types of private pensions offer pension holders a lot of flexibility.  

SIPPs, stakeholder pensions, and personal pensions all allow you to choose the provider and the contribution amount, and in many cases you’ll be able to change the size of your contributions whenever you want.  

This flexibility extends to how you access your pension in retirement too, because since the pension freedoms introduced in 2015, SIPPs, personal pensions and stakeholder pensions allow you to tailor your retirement income to your own needs. 

Investment Control 

SIPPs in particular give you a lot of flexibility when it comes to choosing how your pension pot is invested, allowing you to build portfolios from individual shares, bonds, and other investments. 

Personal pensions give you some degree of control of investment decisions too, but this will usually be limited to specific funds rather than individual stocks and shares. 

Portability 

Personal pensions belong to you and move with you throughout your career, regardless of employment changes. This portability is particularly valuable in today's job market, where people often change employers multiple times during their working lives. 

Stakeholder pensions are designed to be portable too, and even a workplace pension can be consolidated into one of your other private pensions if you leave that employer. 

Tax Efficiency 

Private pensions are some of the most tax-efficient savings options available for people in the UK who are planning for retirement. You receive tax relief on contributions, can enjoy tax-free growth on investments, and can take 25% of your pot as tax-free cash when you retire.  

H2: What are the downsides or risks of a personal pension? 

While SIPPs, stakeholder pensions, and personal pensions are useful tools when saving for retirement, they do have one or two downsides.  

No employer contributions 

The biggest disadvantage of any private pensions that aren’t workplace pensions is that they won’t offer employer contributions. If you have access to a workplace pension where your employer contributes 3% or more of your salary, opting out of that workplace pension likely wouldn’t be a good idea because you’d forgo those employer contributions.  

Fees and charges 

Personal pensions and SIPPs often have higher charges than workplace pensions schemes because they don’t benefit from the same economies of scale.  

Stakeholder pensions do offer a cap on the fees the pension provider can charge, but that cap was set at a time when pensions usually had higher fees across the board. For that reason many modern SIPPs and standard personal pensions now offer lower fees than stakeholder pensions. 

Decision burden 

Private pensions that aren’t workplace pensions will likely require you to make decisions about providers, contribution levels, and retirement planning, and some (such as SIPPs) may also require you to choose the investments yourself. 

How much can I contribute and what about tax relief? 

It’s really important to understand contribution limits and limits on how much tax relief you can receive for your pensions.  

Annual Allowance 

The standard Annual Allowance is £60,000 for pension contributions in the 2025-26 tax year, and that limit covers all your pension contributions including personal pensions, workplace pensions, and any third-party contributions. This is a total limit across all your pensions, not a separate allowance for each one. 

Your contributions are also limited by your annual income - you can contribute 100% of your annual earnings each year, so if you earn less than the £60,000 Annual Allowance figure you’ll only be able to contribute that lower amount. 

Tapered Allowance 

High earners face reduced annual allowances through tapering rules. If your 'adjusted income' (your total income plus employer pension contributions) exceeds £260,000, your annual allowance reduces by £1 for every £2 of income above this threshold. 

The minimum tapered allowance is £10,000, which is reached when adjusted income hits £360,000. These rules are complex and can create unexpected tax charges for high earners, making professional financial advice a good idea for people with this amount of income. 

Carry Forward 

You can use unused Annual Allowance from the previous three tax years to make larger contributions. This is particularly useful if you receive bonuses, inheritance, or have years where you earned less than you’re earning now. 

To use carry forward, you must have been a member of a registered pension scheme in the years you're carrying forward from, even if you didn't make contributions. 

Lump Sum Allowance 

The lifetime allowance was abolished in April 2024, replaced with three new allowances: 

• Lump sum allowance: £268,275 maximum tax-free cash across all your pensions  

• Lump sum and death benefit allowance: £1,073,100 maximum amount that can be paid out tax-free, consisting of both the £268,275 tax free lump sum for the individual pensionholder, and a tax-free death benefit allowance for their beneficiaries if the pensionholder dies. 

• Overseas transfer allowance: £1,073,100 for transfers to overseas schemes. 

These changes to the rules provide more flexibility for most savers, while maintaining some limits on the most generous tax reliefs. 

When and how can I access a private pension? 

Private pensions that are Defined Contribution schemes can offer a lot of flexibility when it comes to how and when you access your retirement savings, although this does mean you’ll also have to carefully calculate your approach to withdrawals.  

Minimum age for accessing your private pension 

You can usually access a private Defined Contribution pension from the age of 55, although this will rise to 57 in 2028. Some pension schemes may have higher minimum ages written into their rules, so it's important to check your specific scheme's terms. 

Early access before age 55 is only permitted in truly exceptional circumstances, primarily serious ill health that prevents you from working.  

25% Tax-free lump sum 

Most private pension holders can take up to 25% of their pension pot as tax-free cash, subject to the lump sum allowance of £268,275. You don't have to take this all at once – you can take it in stages as you access different parts of your private pension. 

Of course, it’s important to remember that taking tax-free cash does reduce your remaining pension pot, which will have an impact on your future retirement income.  

Drawdown vs. annuity vs. lump sums 

Drawdown allows you to keep your pension invested while taking income as needed. Your pot remains invested and can continue growing, but the value will fluctuate with market performance.  

Lump sums give you access to larger amounts when needed, though 75% of any lump sum (after taking your 25% tax-free entitlement) is taxable at your marginal rate. Large withdrawals can push you into higher tax brackets, so it’s a good idea to speak to a financial adviser if you’re considering a large lump sum. 

Annuities provide guaranteed income for life (or for a very long period of retirement, such as 20 years or 25 years) in exchange for all or part of your pension pot. Once purchased, your payouts will be fixed (unless you choose an escalating annuity, which would rise with inflation), but you have a stable, predictable income. 

Many people combine these approaches, using part of their pot for an annuity to cover essential expenses and keeping the remainder in drawdown for flexibility. 

What happens to a private pension when I die? 

At present private pensions are classed as being outside the pensionholder’s estate for inheritance tax purposes, but the UK government is planning to change those tax rules in April 2027.  

The draft Finance Bill 2025-26, which was published in July 2025 and is expected to be confirmed by the Chancellor in the Autumn Statement, aims to bring unused pension funds and death benefits inside the pensionholder’s estate for inheritance tax, which means anyone who dies after the new rules come into effect in April 2027 could see their pensions subject to inheritance tax. 

The new rules are expected to receive royal assent shortly after the Autumn Statement, at which point they will become law. 

Beneficiaries: Most private pension providers allow you to complete nomination forms specifying who should inherit your pension pot.  

It’s important to update your nominations after major life events like marriage, divorce, or births. 

Tax: At present, how your beneficiaries are taxed largely depends on your age when you die: 

• Death before age 75: Before the new inheritance tax rules come into effect in April 2027, your beneficiaries should be able to inherit your entire pension pot without paying inheritance tax or income tax if you’re under 75 when you die. After April 2027 (and assuming the new rules aren’t amended again before they pass into law), your beneficiaries will be liable for inheritance tax on a pension they inherit from you, but if you die before the age of 75 then they won’t have an additional income tax liability.  

• Death after age 75: At the moment, if you’re 75 or older when you die then you your beneficiaries will have an income tax liability (at their marginal tax rate) on any money they withdraw from your pension, but they won’t be liable for inheritance tax. After the new rules come into effect in April 2027, the beneficiaries of someone who is 75 or older when they die could face both an inheritance tax liability and an income tax liability. 

Inheriting a Drawdown Account: Beneficiaries can often continue your drawdown arrangement, keeping the money invested while taking income as needed. This allows them to manage their tax liability by controlling when and how much they withdraw. 

Other Options: Alternatively, beneficiaries can take lump sums, buy annuities for guaranteed income, or transfer the pension that they’ve inherited, although it would need to be kept separate from their existing pension funds because it will be taxed differently. This flexibility allows them to better integrate inherited pensions into their own retirement planning. 

Common myths about private pensions 

“I need a lot of money to start a personal pension” 

Many people believe they need to wait until they’re earning ‘more’ before they set up a pension, but in fact many providers have contribution minimums that are as low as £20, and stakeholder pensions are specifically designed to be accessible to people with lower incomes.  

The government provides tax relief on pension contributions regardless of the amount, making even small contributions worthwhile. Even a £20 monthly contribution becomes £25 a month in your pension pot after tax relief. 

“My money is locked away forever” 

DC pensions do restrict access until age 55 (rising to 57 in 2028), but once you reach the minimum age you have a lot of flexibility over how and when to access your money. 

You can take 25% as a tax-free lump sum immediately, then use drawdown to access the remainder flexibly. Unlike the old rules that required the purchase of an annuity, the pension freedoms rules introduced in 2015 mean you now have much more control over how you access your pension. 

“I Don’t Need One If I Have a Workplace Pension” 

Workplace pensions are an excellent foundation for retirement planning, but that doesn’t mean there isn’t value in having a separate personal pension, stakeholder pension, or SIPP as well.  

Private pensions that are outside your workplace pension allow you to boost your retirement savings while still benefiting from tax relief. While many workplace pensions do allow pensionholders to make additional contributions too, a separate, standalone private pension is often an appealing option for people who might have additional sources of income beyond their 9-to-5 job, such as a side business, consulting, or a rental property.  

When should I consider seeking advice? 

Professional financial advice can be very useful when you’re planning for retirement, particularly if you have a complex financial situation or you’re planning something that could have a big impact on your retirement income, such as early retirement or taking a large lump sum.  

Choosing Between Providers 

Financial advisers can help you choose between the many different pension providers and pension types, which can be particularly useful if you’re keen to make significant contributions to a private pension plan but aren’t sure which option to go with.  

High earners 

If your income is over £200,000 then you’re approaching the point at which your Annual Allowance will be reduced through a calculation known as tapering, and this means your higher than average income will result in additional tax implications.  

High earners may also benefit from financial advice about balancing pension contributions with other investments like ISAs. 

Approaching retirement 

It can sometimes be tricky to figure out the best way to access your pension after you’ve retired, particularly if you have a large pension pot. With that in mind, it would be a good idea to consult with a financial adviser when you’re approaching retirement age in order to come up with a plan for that retirement income. 

Advisers can also help you navigate the complexities you might face if you have other sources of income besides your pensions, such as ISAs, rental property, or other investments.  

Frequently Asked Questions 

Can I have more than one personal pension? 

Yes, you can have multiple personal pensions with different providers. Some people use this approach to access different investment options or spread risk across providers. However, multiple pensions can complicate management and tax calculations, and in some cases they might result in higher fees.  

From a tax perspective, it’s important to remember that the Annual Allowance applies across all your pensions combined, not separately to each one. 

Can I contribute to a personal pension if I already have a workplace pension? 

Yes, you can contribute to both workplace and personal pensions simultaneously. But it’s a good idea to make sure you're maximising your workplace pension contributions first, otherwise you’ll lose out on your employer’s contributions.  

Personal pensions work well for people who want an additional source of retirement savings beyond workplace provision, but it’s really important to remember that the Annual Allowance applies to your total contributions across all pensions. 

What’s the difference between a stakeholder pension and a SIPP? 

Stakeholder pensions are designed for flexibility in terms of how you contribute, and how much, and they have capped fees and charges.  

SIPPs are flexible in a different way - they give you more flexibility to choose the investments your retirement savings are invested in. 

Because stakeholder pensions have capped charges and simplified investment options, they tend to be more suitable for simple, straightforward retirement saving.  

On the other hand, SIPPs offer extensive investment choice, including individual shares, bonds and property, but they may also have higher charges and require more investment knowledge.