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What is a personal pension?

Unlike a workplace or state pension, a personal pension is a retirement savings vehicle you arrange yourself.

When you start a personal pension, you appoint a pension company, insurer or platform to manage your investments for you. The pension fund takes care of the administration, and many will offer to choose the stocks, shares and bonds you invest in for you. However, if you want more control, you can opt for a self-invested personal pension (SIPP) that allows you to choose your own investments.

A personal pension is a type of defined contribution or “money purchase” scheme. That means that the money you get in retirement is defined by how much you contribute, the additional tax relief and any returns your investments generate.

If you don't have a workplace pension - because you’re self-employed or a stay-at-home parent, for instance - a personal pension could be a good way of saving for your retirement. You can also get a personal pension alongside a workplace scheme, but usually, you’d be better off saving into your workplace pension if you have one.

How a personal pension scheme works

Once you’ve selected a private pension provider, you can start contributing money. Your income level determines how much you can save tax-free, but no one can contribute more than £40,000 a year without attracting a tax charge. For anyone earning less than that each year the limit will be lower.

Your pension fund contributions will be invested in stocks, shares and other assets. The aim is to grow your fund before you retire. Many providers allow you to select a generic retirement income fund where the specific investments are chosen for you by experts. However, you can pick a provider that gives you more control and choose your own investments if you want.

 When you hit a certain age - typically 55 or 57 depending on when you were born - you can start claiming your pension. You could have it as a guaranteed income for life (known as an annuity), a lump sum, a series of lump sums, or a mixture.

Why opt for a personal pension plan?

A personal pension might be a good idea if you don't have the option to save into a workplace pension. You can build a retirement income and get tax relief on your personal pension contributions. 

Typically, personal pension providers claim pension tax relief and add it to your pension pot. But if you're a higher or additional rate taxpayer, you'll need to claim the additional rebate through your tax return.

If you're interested in setting up a pension plan, it might be worth speaking to an independent financial adviser to get some personal pension advice. You can discuss your retirement goals if you're unsure what type of pension scheme to invest in.

What types of personal pension schemes are there?

The most common types of personal pension are where providers choose the funds you invest in. This tends to be how it works if you're using a group personal pension plan or have a workplace pension plan. This is a popular approach because you don't have to make financial decisions about where to invest your funds.

The other option is a self-invested personal pension. With these DIY funds, you can choose where you want to invest. There's a more extensive list of funds to choose from – and it’s imperative to do lots of market research.

Picking the best pension companies and the best pension plans

Our comparison lets you find the best personal pension companies by comparing the following:

• How much they charge you in annual fees

• The number of funds they let you choose from

• How much they let you invest.

You can click “view details” to find out more about any companies in our comparison. There are many other charges that might apply when managing your pension, so it's a good idea to visit each company's website to get more details. Compare the costs from all the pension companies before you invest.

Our pension comparison above is a good place to start if you're trying to find the best UK pension scheme for your needs. But you might also like to get pension advice from an independent financial adviser.

Can you withdraw money from your pension?

There's now more choice and flexibility than ever when it comes to your pension. This applies to how you take the money out and when you take it out.

The personal pension age is currently 55 but will rise to 57 in 2028. When you reach that age, you can start drawing money from your personal pension. You can take a cash lump sum, multiple lump sums, draw a regular income or even use the cash to buy an annuity (guaranteed income for life).

If you’re still working, you might prefer to wait until you retire to start taking money out.

Don’t forget, you pay income tax on most pension withdrawals, so it’s important to think carefully about what money you’ll need and when. Taking all the cash at once will likely lead to a hefty tax bill.

How much will I get from my personal pension scheme when I retire?

The size of your pension pot when you retire depends on several factors. These include:

• How long you've been making personal pension contributions for

• How much you've paid into your pension in that time

• The performance of your investments

• The amount of tax relief you’ve received

• How much you have to pay in charges (all personal pension providers are different)

You could use a personal pension calculator to get a rough idea of how much you might have.

But remember that a personal pension calculator will only ever give an estimate. Even the best personal pension plans might underperform, whereas others might overperform estimates. A personal pension calculator can't possibly know the size of your pension pot at retirement.

Last updated: November 19, 2022