Everything you need to know about pensions in the UK

Its no doubt that pensions play a critical role in the UK financial landscape. Understanding them is essential. Knowing your options is key. But they can be mysterious. Sometimes overwhelming. And, often, confusing. As long as you stay within your annual and lifetime limits, you can save into several different pensions and gain extra benefits with pension tax relief.

A quick recap on pensions

In its simplest form, a pension is a long-term savings plan which works to provide you with income during retirement. Pensions are tax efficient – not to be sniffed at.

Let’s start with the simple stuff.

State Pension

A regular payment you receive from the government when you reach the State Pension age. At current, this sits at sixty six years old but is scheduled to increase to sixty seven for both men and women in April of 2028.

This age will likely keep increasing; just ten years ago it was at sixty five.

To take your full state pension, you’ll need to have made a certain number of qualifying years of National Insurance contributions. If you were born before April 2026 and are a man, you’ll need forty four years. If you’re a woman, you’ll need 39.

If you want to qualify for the full State Pension and have missed years of National Insurance contributions, you can ‘top up’. Due to rule changes, after the 5^th April 2025, you will only be able to make contributions for the past six years. Previously the timeframe was more generous.

You have until tax year end (5^th April) each year to make your top ups.

Workplace Pensions

These are schemes set up by employers to support their employees in saving for retirement. In recent years, automatic enrolment has been introduced, meaning you will be automatically enrolled into their pension scheme if you’re eligible.

Both you and your employer can contribute to this pot.

Personal Pensions

These are arranged by the individual themselves.

With the help of a pension provider (often insurance companies or banks) like Aviva, Royal London, Scottish Widows, etc. These pension pots will allow you to make both regular and lump sum contributions to save towards your retirement.

With personal pensions, you can choose how to invest your money, giving you increased flexibility.

Self-Invested Personal Pensions (SIPP)

A SIPP is a type of personal pension which offers greater control over how your pension is invested. You can choose from a wide range of investment options including stocks, shares, bonds, and property.

A SIPP can benefit you by allowing a more hands-on approach to investing, offering potentially higher returns, a wider diversification of your portfolio, and tax relief. It is, however, a lot more complex and brings a higher risk.

Contribution options

A pension pot is only worth as much as you put in it. So, what are your contribution options? Let’s run through some commonly asked questions:

What are the minimum contribution rates for a Workplace Pension?

Employers are legally required to contribute a minimum of 3% to your workplace pension if you meet the criteria.

Employees must contribute a minimum of 5%.

Only a select few workplaces will contribute without their employee also contributing.

How do pensions work if you’re a self-employed business owner?

If you’re self-employed, you can make personal contributions to a pension plan, on which the government will provide tax relief up to a certain limit.

The maximum tax free contribution limit will be based on your earnings.

Contributions will be flexible, meaning you can pay in as little or much as you like.

What tax relief do you get for pension contributions?

The tax relief you gain is one of the biggest advantages of contributing to a pension.

In the UK, pension contributions are made from your gross income (pre-tax), meaning your taxable income is reduced. For instance, if you earn an annual income of £250,000 and want to contribute £40,000 to your pension, the government will add 20% basic rate tax relief.

Using this example, you would therefore only need to contribute £32,000, with the government adding £8,000.

What’s the best way to withdraw from your pension?

When you reach retirement age, you can begin to make pension withdrawals.

There are several main ways to access your pension savings:

1. Lump sum: take up to 25% of your pension pot as a tax-free lump sum. The remaining 75% of the pot will be subject to income tax when withdrawn.
2. Drawdown: leave your pension pot invested and make regular withdrawals, giving you more flexibility.
3. Annuity: a product which provides a guaranteed income for life in exchange for a lump sum from your pension pot.
4. No withdrawal: leave your pension invested, without withdrawing anything, and wait until the time is right for you.

Inheriting a pension

When it comes to estate planning, pensions make up a large part of the conversation.

Pensions can usually be inherited, but the rules differ dependant on the type of pot. For instance, if you die before retirement age, a workplace and/or personal pension can be passed on to your nominated beneficiaries. The rules differ from pension to pension, but in general, the beneficiaries can receive the money as a lump sum, income payments, or as a beneficiary annuity.

If you die after reaching retirement age, the pension value may still be passed on, but your beneficiaries may be subject to tax.

Pension Benefits

Pension death benefits are currently paid tax free if the individual dies before 75, assuming benefits are paid out within the relevant two year period no matter which way the benefits are taken. And, currently, death benefits paid when the individual dies at 75 or over are taxed at the recipient’s income tax rate.

This is, however, set to change from 2027. At this point, pensions will no longer be exempt from inheritance tax. There is not yet any finalised legislation regarding this change, so the details may be adapted. But, at time of writing, it looks as though pension pots will be subject to 40% inheritance tax – a change which is expected to raise nearly £1.5bn.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.