What is a personal pension?

Investing in a pension is a tax efficient way of saving for your retirement.

Tax relief on pension contributions

Personal contributions are paid net of basic-rate tax and the pension provider claims a 20% tax refund from HMRC which is added directly to the pension plan. Higher rate tax-payers can claim higher rate tax relief for contributions via their Self-Assessment tax returns.

Once invested, monies in a pension are exempt from UK Income Tax and Capital Gains Tax. Funds invested in a pension are usually not included in the value of your estate for Inheritance Tax purposes, and so pensions can allow funds to be passed down through the generations free of Inheritance Tax. The value of funds accrued over certain limits (the Lifetime Allowance) will be subject to a tax charge on death, when the funds are used, or at age 75, whichever is earliest.

Withdrawing from a pension

The minimum age you can normally access your pension savings is currently 55, and is due to rise to 57 on 6 April 2028, unless you have a lower protected pension age. You can usually withdraw a maximum of 25% of the fund as a tax-free cash sum. The fund remaining after tax-free cash can be used to provide you with an income in your retirement (regular or ad-hoc), and any income withdrawn would be subject to Income Tax.

You are able to invest in most types of investments such as cash deposits, insurance company funds, stocks and shares, OEICs, unit trusts and investment trusts. Some types of pensions will also allow investment into commercial property and other less mainstream types of investments.