Personal pensions

A personal pension is a money purchase scheme which is a tax-efficient long-term investment designed to provide you with an income in retirement. Your employer or your own company, if you are a Director, may also contribute into this for you.

You cannot normally access money in a personal pension until age 55 (57 from 2028). The benefits you receive at retirement will depend on a number of factors including the value of your plan when you decide to take your benefits which isn’t guaranteed.

Will I receive tax relief on my pension contributions?

Depending on your personal situation you can receive tax relief on your personal pension contributions. The government usually adds money to your pension in the form of tax relief, so as a basic rate taxpayer the government will add £20 to your pension for every £80 you pay in.

If you are a higher rate taxpayer, you may be able to claim any higher rate tax relief you are entitled to through your self-assessment returns. So you still pay £80, receiving £20 tax relief at source, and then claim the further £20 through your self-assessment tax return, making the net cost effectively £60.

Additional rate tax payers, can reclaim further tax relief on pension contributions through an annual self-assessment tax return.

In Scotland, income tax is banded differently, and pension tax relief is applied in a slightly different way. Starter rate taxpayers pay 19% income tax but get 20% pension tax relief. Basic rate taxpayers pay 20% income tax and get 20% pension tax relief. Intermediate rate taxpayers pay 21% income tax and can claim 21% pension tax relief. Higher rate taxpayers pay 41% income tax and can claim 41% pension tax relief. Top rate taxpayers pay 46% income tax and can claim 46% pension tax relief.

Your personal pension provider if you are self-employed will claim basic-rate tax relief on your behalf, which will be added to your pension pot.

How are my personal pension contributions invested?

Most defined contribution personal pension plans offer a range of different investment funds that are designed to invest your money in different ways over the years until you reach your retirement.

Typically you will be able to decide to invest in one fund or to spread your money over a number of different funds typically via ready-made investment options. These funds are managed by professional investment experts.

Investment types may include investing in company shares, property and bonds, both in the UK or overseas. No tax is payable on income from investments or capital growth within the pension, provided they remain within the annual and lifetime allowances.

How do I take money from my personal pension?

You can normally take money from your personal pension when you reach age 55 (increasing to 57 from 2028). When and how you take your money can make a big difference to how much tax you might pay and how long your money will last.

There are different ways you can take money from your pot. Keep in mind that you can choose one option or a combination of options. You can read more about the various methods of withdrawing from your pension in our Pension Withdrawal knowledge article.

What happens to my personal pension pot if I die prematurely?

Pension providers will usually take into account the people or good causes you want to leave your pension pot to when you die. Your beneficiaries will typically be given a range of options, however, not all pension types will let you do this so it’s important to check this with your provider if you are unsure.

If appropriate you may also have the option to transfer your personal pension plan to another provider, especially if your current provider does not offer the death benefits or flexibility you require. You should always seek professional financial advice before starting a transfer if you are unsure as transferring will not be right for everyone.