What is a private pension?

How do private pensions work?

All private pensions help you save for your retirement and top up the State Pension when you get there. When you pay into one, your money goes into a pension pot that will go towards your income in retirement.

How DC pensions work

If you’ve got a DC pension:

• You’ll pay into it
• Your employer might top up your payments
• You’ll get tax relief from the government

When you reach 55 (rising to 57 from April 2028), you’ll be able to access your money. Before that, we recommend planning carefully and getting professional advice to:

• Make sure you’re saving enough to support your ideal retirement lifestyle
• Help you choose what do with your pension pot once you can access it.

There are several different kinds of DC pension. To find out more about what they are and how they work, take a look at our DC pensions article.

How DB pensions work

If you’ve got a DB pension, you’ll pay into it while you’re working for the employer who set it up for you. You won’t have any control over how your money’s invested – it’s managed by the pension scheme’s trustees.

When you reach retirement, you’ll start getting guaranteed payments. The actual age when that happens is called normal pension age (NPA) and varies from scheme to scheme. The amount you get will be based on:

• Your length of service with your employer
• Your final or average salary while you were with them

The exact details will depend on how your employer’s set the scheme up.

Is it worth having a private pension?

It depends on the kind of retirement lifestyle you’re hoping for. The State Pension is currently £11,502.40 a year, which will only support a very basic lifestyle. If you’re not sure how much later life income you might need, visit the Retirement Living Standards site to find out. As a minimum they recommend an income, after tax has been deducted, of £14,400 in retirement for someone living outside of London.

So the chances are you’ll need more than the State Pension provides. If that’s the case, a private pension is a tax-efficient way of topping it up.

• If you’re in full-time employment, you’ll probably already have a workplace pension to pay into. As Defined Contribution (DC) pensions are the most common type of private pension, we'll focus on that for the rest of the article. Your employer might match some or all of your payments, and you’ll get tax relief from the government too.
• If you’re self-employed and want to start saving for later life, you might need to set up a personal pension. You won’t get any employer payments, but you will get a helpful 25% tax relief from the government.

And of course, even though pensions are a great way of saving for the future they’re not your only choice. If you’re not sure what’s best for you, we’d recommend a chat with a financial adviser.

Is it better to have a pension or savings?

It’s not an either-or choice – ideally, it’s best to have both. You save into your pension to be ready for later life, while putting away money to cover shorter-term costs. They can include anything from big life events like getting married or buying a home to getting through times without work.

And when you’re working out how much to save into your pension and how much to put into other savings vehicles, like an ISA or a Lifetime ISA, don’t forget the benefits that come with pensions.

If you’re paying into a workplace pension, your employer will top up your payments with at least 3% of your salary – and they might match higher payments. 
If you have a workplace or a personal pension, you’ll enjoy up to 25% tax relief from the government on any contributions you make.

For a more in-depth comparison between ISAs and pensions, check out our ISA or pension article.

Private pension tax relief

Private pension tax relief can be a complicated area. We’re going to lay out the basics as simply as we can. So:

• You can get tax relief on private pension contributions worth up to 100% of your annual earnings
• You’ll either:
  • Have your pension contribution taken from your net pay, reducing the overall amount of tax you pay on earnings and giving you tax relief straight away
  • Get relief at source, where your provider will claim tax relief at the basic rate and add it to your pension pot.
• If you’re a higher rate tax payer (above 20%) you may need to claim extra tax relief yourself through a self-assessment tax return
• You can pay money into your pension until you’re 75 and still get tax relief
  • If you start drawing on your pension, you’ll trigger the money purchase annual allowance (MPAA), which caps the amount you can pay in at £10,000
• The exact amount of tax relief you can get will depend on your total annual income and your tax rate.

And for a deeper dive we’d recommend:

• Reading our Pension tax relief and benefits article
• visiting GOV.uk’s Pension tax relief page
• talking to a financial adviser, tax adviser or accountant