Personal Pensions and SIPPs Explained

Types of personal pension

• Stakeholder pensions: simple, low-cost pensions with capped charges, and flexible contributions. They have fewer investment choices.
• Standard personal pensions: offered by insurers and investment firms, usually with a range of funds.
• SIPPs: let you choose from a wide range of investments, such as funds, shares and investment trusts. Some are low-cost, "do it yourself" platforms, while others are more specialised, and may allow riskier or less common assets.

Tax relief

Pension contributions get tax relief, which is one of their main advantages. If you pay into a personal pension, your provider claims basic-rate tax relief at source and adds it to your pot. For example, a net payment of £80 becomes £100 in the pension. If you pay a higher or additional rate of income tax, you can claim extra relief through your tax return or by contacting HMRC. Scottish taxpayers have different rules.

There are limits on tax-relieved contributions:

• You can usually get tax relief on contributions up to 100% of your earnings, subject to the annual allowance
• Non-earners can still pay in a modest amount each year and get basic-rate relief
• Higher earners may have a reduced annual allowance
• Unused allowance from the previous three years can sometimes be carried forward

Investing your pension

Your pot is invested, and the value can go down as well as up. You may get back less than you pay in. Common options include:

• Default or lifestyle funds, which gradually reduce risk as you approach retirement
• Index-tracking funds, which follow a market and typically have low charges
• Actively managed funds, where a manager picks investments, usually at higher cost
• Individual shares, bonds and investment trusts in a SIPP

Charges

Costs reduce your returns, and over decades small differences matter. Check:

• Platform or administration fee, often a percentage of your pot or a flat fee
• Fund charges, shown as the ongoing charge figure (OCF)
• Dealing fees for buying or selling investments
• Transfer or exit fees
• Advice fees, if you use an adviser

Accessing your money

You can normally access a DC pensionDefined contribution pensionA defined contribution pension builds up a pot from contributions and investment growth, and the amount you receive at retirement depends on the pot's value.Read more → from age 55, rising to 57 from April 2028. You do not have to retire. Options include:

• Tax-free cash: usually up to 25% of the pot, up to a lifetime limit, with the rest taxable as income
• Annuity: you swap some or all of your pot for a guaranteed income, either for life or a set period. Rates depend on your age, health and the market. Shop around, because the open market option can pay much more than your own provider's offer.
• Flexi-access drawdown: your money stays invested and you take income as you need. Your income is not guaranteed, and your pot could run out if you take too much or investments fall.
• Uncrystallised funds pension lump sums (UFPLS): you take cash from your pot, usually 25% tax free and 75% taxable.
• A combination of the above

Pensions and inheritance

If you die, your pension may be passed on to your beneficiaries. The tax treatment depends on your age at death, and the rules on inheritance tax for pensions have been changing, so check the current position on GOV.UK. Keep your nomination form up to date.

Self-employed saving

If you are self-employed, there is no employer to contribute, so saving is entirely your responsibility. A personal pension or SIPP is a common route. Set up regular payments, and set aside a percentage of your profits. Consider paying more in good years. A pension can reduce your tax bill, but do not neglect your emergency fundHow to Build an Emergency Fund in the UKWhy you need an emergency fund, how much to save, where to keep it and how to build one even on a tight budget, with practical steps for UK savers.Read more →. See how to build an emergency fund.

Choosing a provider

1. Check the provider is authorised by the FCA.
2. Compare charges and the investment options.
3. Check the platform is easy to use and has good customer service.
4. Look at what happens if the provider fails. The Financial Services Compensation Scheme (FSCS) may protect some pensions, up to limits.
5. Never act on an unsolicited call or message. See how to spot a pension scam.

Consolidating old pensions

Combining small pots can simplify things and reduce charges, but check first for guarantees or valuable benefits you could lose, exit penalties and whether the new provider is cheaper. Pension Tracing Service on GOV.UK can help you find old pots. Take advice if the old pension has special guarantees. See workplace pensions explained.