Personal Pensions: How They Work

Personal pensions play an important role in retirement planning, offering a tax-efficient way to build savings independently of your employer. They allow you to choose your contribution level, select your investments, and shape your retirement income over time.

Below, we cover how personal pensions work, the different types available, and the key rules you should be aware of.

What Is a Personal (Private) Pension?

A personal pension, sometimes called a private pension or private pension scheme, is a retirement savings plan you arrange yourself. Unlike a workplace pension, it isn’t tied to your employer, and you decide how much to contribute and when.

Although you manage it independently, your pension provider invests your contributions into funds or portfolios designed to grow your money over the long term. In return, the government provides tax relief on your contributions, making personal pensions one of the most tax-efficient ways to save for retirement.

A personal pension is:

Set up by you, not your employer
Allows flexible payments
Includes tax relief from the Government
Builds a long-term pot you can access from age 55 (rising to 57 in 2028)
Enables you to choose how your money is invested

A private pension is a personal savings plan designed to help you build retirement income on your own terms.

Types of Personal and Private Pensions

There isn’t just one type of personal pension. Each option offers a different blend of cost, flexibility and control, meaning you can choose a structure that fits your financial goals and investment confidence. The three most common types in the private pension UK market are outlined below.

Stakeholder pensions

A stakeholder pension is designed to be simple and accessible, with low minimum contributions and caps on charges. Payments can start and stop as needed, and the investment choice is deliberately limited to keep things straightforward. Because they’re easy to set up and manage, stakeholder pensions appeal to those beginning their retirement savings or looking for a low-maintenance option.

Self-Invested Personal Pensions (SIPPs)

SIPPs offer a far wider scope of investment choice, giving you control over where your money goes. Depending on the provider, this could include shares, bonds, funds, investment trusts and even commercial property. This level of freedom brings greater responsibility, typically higher charges and a need for closer involvement. SIPPs are therefore more suited to confident investors or those working alongside a regulated financial adviser.

Traditional personal pensions

A traditional personal pension sits between a stakeholder pension and a SIPP. It offers a selected range of investment funds chosen by the provider, alongside flexible contributions and online tools to help you track performance. It’s a popular choice for people who want growth potential without needing to manage every investment decision themselves.

Each type of private pension has its advantages. The right one for you will depend on how hands-on you want to be, how you prefer your money to be managed, and the level of growth potential you’re comfortable aiming for.

Setting Up a Private Pension

You can set up a private pension at any point in your working life; there is no minimum age, apart from needing to be under 75 to receive tax relief. Most people open a personal pension for the following reasons:

They are self-employed
They want to save more on top of a workplace pension
They have leftover pension pots and want to consolidate
They are not eligible for automatic enrolment
They want to control their retirement investment strategy

How to set up a private pension

Setting up a private pension doesn’t need to be complicated. The process is designed to be flexible and accessible. By breaking it down into five simple steps, you can begin building your retirement pot with confidence.

Choose a pension provider – start by choosing a provider or speaking to an adviser who can recommend one that matches your needs.

Decide how much you want to contribute – once you know where your pension will be held, work out how much you’d like to pay in and how often.
Select your investment choice or portfolio – each provider will offer a range of portfolios, from cautious options designed to preserve value, to higher-risk choices aimed at long-term growth.
Set up payments – arrange how your contributions will be made, whether through regular monthly payments, annual contributions or occasional lump sums.
Monitor your pension online – once your pension is up and running, you can track its performance, review your investments and make changes if required.

Many people find professional advice useful at this stage, especially when comparing charges, investment choices and long-term performance.

Paying Into a Personal Pension

One of the biggest advantages of a personal pension is the tax relief you receive on your contributions:

How pension tax relief works:

If you’re a basic-rate taxpayer:

For every £80 you contribute, the Government adds £20
(Total relief = 20%)

If you’re a higher-rate taxpayer:
You can claim an additional £20 through self-assessment
(Total relief = 40%)

If you’re an additional-rate taxpayer:
You can claim an additional £25 through self-assessment
(Total relief = 45%)

Result:
Your £80 contribution becomes £100 or more once higher/additional-rate relief is reclaimed.

NB: Tax relief applies whether you hold a personal pension, workplace pension, stakeholder scheme or SIPP.

Investment risk and default funds

Since your pension grows through investment, it’s important to select an approach that matches how much risk you’re willing to take. Most personal pensions offer a default fund for those who prefer a hands-off approach, while others allow you to select different portfolios depending on how you want your money to grow. Reviewing your investments from time to time helps keep them in line with your long-term goals.

Annual allowance

There is a limit to how much you can contribute each year while still receiving tax relief. The current annual allowance is £60,000, or 100% of your earnings for the year, whichever figure is lower. Some people, such as very high earners or those who have already accessed pension income, may have a reduced allowance, but for most savers this remains the standard limit.

Those with very high incomes or who have reached the Money Purchase Annual Allowance (MPAA) may have smaller limits.

Taking Money from a Private Pension

You can normally start accessing a private pension in the UK from age 55 (rising to age 57 in 2028). Once you reach this point, you have several options for how to take your money, each offering different levels of flexibility, certainty and tax treatment.

Take up to 25% tax-free: You can usually take a quarter of your pot tax-free, either as a lump sum or through phased withdrawals.

Drawdown: You invest the remaining money and take income as needed. This offers flexibility but carries investment risk.

Annuity: You turn some or all of your pot into a guaranteed income for life.
This is stable and predictable, but rates vary and can’t usually be changed later.

Lump-sum withdrawals: You take your pension in chunks. The first 25% of each withdrawal is tax-free, with the remainder taxed as income.

Deciding how to take your pension is an important step, and it’s worth taking the time to understand how each option works and what it could mean for your long-term income.

Advantages and Disadvantages of Private Pensions

Personal pensions can be an effective way to save for retirement; the key is choosing the right structure and managing it carefully over time. To help you evaluate whether a personal pension is right for you, the table below outlines the key advantages and disadvantages to consider:

Advantages	Disadvantages
Tax relief increases your savings and helps your pot grow faster.	Your pension is invested, so the value can rise or fall.
Contributions are flexible, making it suitable for different budgets.	Charges apply, and costs vary between providers.
You can choose how your money is invested, especially with a SIPP.	You cannot normally access your money early, except in limited circumstances.
Personal pensions are portable and move with you when you change jobs.	Selecting investments can feel complex without clear guidance.
Long-term investment potential may deliver meaningful growth.	Poor investment choices may affect future retirement income.

Overall, a personal pension offers a flexible and tax-efficient way to build retirement savings, but it does require careful planning and periodic review.

How My Pension Expert Can Help

Whether you’re setting up a new personal pension, reviewing your contributions or considering consolidating older pots, My Pension Expert can help you navigate the process with clarity. Our focus is on giving you the information and guidance needed to make confident, well-informed decisions about your retirement savings.

We take the time to understand your circumstances and long-term goals, assess how your existing pensions are performing, and explain your options in straightforward terms. The aim isn’t to steer you toward a particular product, but to ensure you have a clear understanding of how different choices could support your retirement plans.

What we offer:

Regulated financial advice tailored to your goals
Analysis of existing private pensions to assess performance and suitability
Clear explanations of investment options and charges
Support with contributions, consolidations and withdrawals
Personalised retirement planning, ensuring your pension meets your income needs

By combining clear guidance with regulated advice, we help you build a retirement strategy that feels right for you, both now and in the years ahead

Frequently Asked Questions

What is a private pension in the UK?

A private pension (or personal pension) is a retirement savings plan you arrange yourself. You make contributions, receive tax relief, and your provider invests the money to help it grow. It sits alongside, or instead of, a workplace pension.

How do personal pensions work?

You pay money into your pension, receive tax relief, and your provider invests the contributions. Your pot grows over time and can be accessed from age 55 (57 from 2028). You can choose drawdown, annuity or lump-sum withdrawals.

How much can I contribute to a private pension each year?

You can contribute up to the annual allowance of £60,000 or 100% of your earnings (whichever is lower). Higher earners or those who have accessed income before may have smaller limits.

Can I have a private pension and a workplace pension at the same time?

Yes. Many people contribute to both. Your workplace pension includes employer contributions, while a personal pension gives you extra flexibility and tax-efficient saving.

What are the tax benefits of a personal pension?

One of the major benefits of a personal pension is the tax relief added to your contributions. Basic-rate taxpayers receive an automatic 20% top-up, while higher-rate taxpayers can claim an extra 20% through self-assessment. Additional-rate taxpayers can claim a further 25% on top.

When can I start taking money from my private pension?

Private pensions can usually be accessed from age 55, rising to 57 in 2028. When the time comes, you can take up to a quarter of your pot tax-free and then choose how to draw the remaining balance, whether through flexible drawdown, an annuity, or lump-sum withdrawals.