What is a private pension?

The term private pension covers any pension you open and pay into to save for retirement in a tax-efficient way.

This includes personal pensions you arrange yourself, like Self-Invested Personal Pensions (SIPPs), as well as workplace schemes that your employer sets up for you.

In simple terms, it’s any pension other than the State Pension.

There are two main types of private pensions: defined contribution schemes and defined benefit schemes.

A defined contribution (DC) pension, also known as a ‘money purchase’ scheme, can be a workplace pension set up by your employer, or a personal pension set up by yourself. Regular contributions are made by you, and if it’s a workplace scheme, usually by your employer too. The pension provider then invests these contributions, usually into a fund, with the aim of generating returns. The amount you receive at retirement depends on:
 

• How much you’ve invested
• How your investments perform
• How you choose to withdraw from your pension (e.g. lump sum, drawdown, or annuity)

Defined benefit (DB) pensions are a type of workplace scheme, and work differently from DC pensions. Not only do they provide a guaranteed income for life, but your retirement income is also based on your salary (either final salary or career average), how long you’ve worked for your employer and the scheme’s accrual rate - not on how much you’ve paid in. Once considered the “gold standard” of workplace pensions, DB schemes are now less common in the private sector due to their cost and are mostly found in the public sector.

Workplace pensions

If you’re employed, you’ll normally be signed up to your workplace scheme. Deductions will be taken directly from your salary, and your employer will contribute too. 
 
Defined contribution workplace pensions

• Each month, contributions from you and your employer are invested on your behalf. Auto-enrolment rules mean the legal minimum contribution is 8% of your qualifying earnings, with employers required to pay at least 3%.
• It’s always worth paying in more if you can, especially if your employer matches contributions. In some cases, employers may offer a fixed contribution rate that’s significantly higher than the minimum. However, this isn’t always the case, so you should always double-check.
• Most workplace schemes automatically place your contributions into a default ‘one-size-fits-all’ fund. These funds are designed to be suitable for the ‘average’ person and are often low-risk or balanced.
• Some offer a wider range of investment options suitable for different types of investors, such as risk-averse, moderate, or adventurous. It’s worth checking where your money is currently invested so you can decide whether a different fund might suit you better.

Defined benefit workplace pensions 

• Your employer makes contributions on your behalf and is responsible for ensuring the scheme has enough funds to pay you a guaranteed retirement income.
• You may be required to make contributions, usually taken as a percentage of your salary, alongside any employer contributions. Some schemes may be fully funded by the employer. The amount paid is set by the scheme rules, which are agreed between the employer, the scheme trustees and the actuary - a specialist who calculates how much the fund needs, and advises on contributions and funding strategy.
• Details about your entitlement (your accrued pension) and projected benefits can be found in your pension statement. For any additional information not covered in the pension statement, you should contact your scheme provider directly.

Personal pensions

All personal pensions are defined contribution, but they still come in different shapes and sizes.

• Personal pensions: These are retirement investment accounts, traditionally offered by life insurance companies. Personal pensions usually provide access to a broad range of funds, though the degree of choice varies between providers.
• Self-Invested Personal Pensions (SIPPs): Usually provided by investment platforms, SIPPs offer access to a large selection of investments, including funds, investment trusts, UK and international shares, ETFs, and bonds. Many platforms also offer default investment options and ready-made investment lists if you’d rather take a less self-managed approach. If you want to leave the decision-making to the experts, some providers, such as ii, also offer Managed Portfolios.
• Stakeholder pensions: Introduced in 2001 to encourage more people to save for retirement, stakeholder pensions must meet specific government standards. These include capped charges, a default investment fund, low minimum contributions, flexible payments and no exit fees for transferring out. They’re now less common, mainly because auto-enrolment covers most employees and modern personal pensions and SIPPs can offer lower charges and more flexibility.

Each year, you can invest 100% of your earnings (up to £60,000) into your pension(s). When you make a payment into a pension, your contribution will be topped up by tax relief from the government. As the years pass, these top-ups will give your pension a significant boost.

While all pensions qualify for tax relief, the way it’s applied can vary. You may need to take additional steps to make sure you get the full amount of relief you’re entitled to.
 

• Personal contributions: You’ll automatically receive 20% basic-rate tax relief on your pension contributions, which is claimed on your behalf by your provider. If you pay the higher or additional rate of tax, you’re entitled to even more. But you’ll need to claim the extra 20% (higher rate) or 25% (additional rate) yourself. If you complete a Self Assessment tax return each year, you must claim the tax relief through your return, which can be submitted online. If you do not usually file a tax return, you can make the claim via GOV.UK using HMRC’s online service. 
• Workplace pensions: For defined contribution schemes, you’ll need to find out how your tax relief is applied. If it’s a ‘relief at source’ scheme, you will have basic rate tax relief paid automatically. This means higher and additional-rate taxpayers will need to claim the remainder through their tax return. If your scheme is a ‘net pay’ arrangement, you’ll get the full amount of tax relief straightaway and won’t need to take any further action. To find out how your scheme works, get in touch with your employer.

Tax relief isn’t the only tax benefit of private pensions. Your investments can grow free of Capital Gains Tax, and there’s no tax to pay on your dividends either. And when you access your pot, you’ll also be able to take 25% tax-free cash.

If your employer operates a salary sacrifice arrangement - where you trade a portion of your gross salary for an equivalent pension payment - you will save national insurance (NI) on contributions as well as income tax. Note that under current proposals, from April 2029, only the first £2,000 of employee pension contributions will be NI exempt.

If you’re a high earner with an income between £100,000 and £125,140, your Personal Allowance - £12,570 for 2025/26 - is gradually tapered, creating an effective 60% tax rate for the income in this band. You lose £1 of your personal allowance for every £2 you earn above £100,000, with it being completely withdrawn once you earn above £125,140.

You can strategically reduce the 60% tax trap by increasing your pension contributions. Pension contributions help reduce your adjusted net income, which may help you keep your full Personal Allowance, avoid the High-Income Child Benefit Charge (HICBC), and pay less higher-rate tax.

When you’re paying into a workplace pension, your contributions will automatically be deducted from your salary. If you want to increase (or decrease) your pension payments, you will need to ask your employer to make the change.

Personal pensions tend to be more flexible. The ii Personal Pension (SIPP), for example, lets you set up regular payments, but you can also make ad hoc payments if you prefer. You can vary the size of your contributions as needed, which can be particularly helpful if you’re self-employed or your earnings fluctuate. 

It’s important to know that you won’t normally be able to access your pension until you’re 55 (rising to 57 in 2028). If you need to access your money before then, an ISA may be more suitable.

Another important consideration is that your pension money will typically be invested in the stock market and other assets, meaning its value can rise and fall over time. Even if you have control over your investments, returns are not guaranteed.

But there is a risk of not investing too. Over the longer term, money invested in a pension is likely to grow more than if it were left in cash.

A private pension is a valuable way to save for retirement, and for many, it’s the key to securing a more comfortable retirement.

If you have access to one, a workplace pension is a great starting point, as you’ll benefit from employer contributions. But you may not have this option - for example, if you’re self-employed.
 
There are many situations where it makes sense to have a personal pension, either in place of or in addition to a workplace pension. A personal pension, like the ii SIPP, can be a flexible alternative if you want more control over your investments.

A private pension might be right for you if:

• You’d like to combine several old personal or workplace pensions into one, low-cost, easy-to-manage plan
• You want greater transparency and control over fees
• You’d like access to a wider range of investment options
• You’re self-employed or don’t have access to a workplace pension
• You’re a company director or business owner seeking a tax-efficient way to contribute
• You’d like to make additional contributions for a spouse or partner
• You want to take advantage of carry forward allowances and make larger contributions
• You’d like more flexibility over how and when you access your pension in retirement

Understand your needs

• Think about when you want to retire and how much income you’ll need: Consider whether this pension will be your main pot or a way to top up your existing savings.
• Understand the tax benefits: You’ll receive tax relief on your pension contributions, but allowances apply. For most people the annual limit is £60,000, though this may be reduced for high earners (those with adjusted income over £260,000) or if you’ve taken taxable income from your pension. You may also be able to use carry forward rules to contribute more by using unused allowances from the previous three years.
• Choose the right type of pension: A SIPP offers a wide choice of investments and flexibility. A personal pension from a more traditional provider typically offers less control and may offer less investment choice, however each provider is different.
• Compare providers: Look at fees, investment options, tools, the support that's offered, and customer service. Different providers will suit different needs, so consider what matters most to you.
• Understand your investment options: Decide if you want to pick your own investments or use a Managed Portfolio. Consider your risk appetite and how long you have until retirement.

Setting up your personal pension

• Choose your provider: Once you’ve compared your options, select the provider and pension type that suits your goals.
• Open your account: You can usually apply online in minutes. You’ll need ID and some basic information.
• Set up contributions: Decide how much you want to pay in—this can be regular monthly payments or lump sums. If you’re self-employed, plan contributions around your income.
• Consider consolidating older pensions: If you have old personal or workplace pensions, you may want to combine them into your new personal pension to make your savings easier to manage. Before transferring, check for exit fees or penalties from old pensions, loss of any valuable benefits (such as guaranteed annuity rates), and differences in fees or investment options. Most pension providers can help you with the transfer process if it makes sense for your situation.
• Pick your investments: Choose how your money is invested. SIPPs give you a great range of choice and flexibility over your investments. If you’re feeling confident, you can build your own balanced portfolio of investments. Or, if you’d rather stick to one well-diversified fund, many providers offer ready-made managed portfolios to make life a little simpler.
• Review regularly: Check your pension at least once a year and adjust your contributions or investments as your circumstances change.

Personal pensions take a little more research to set up and get started with. Whether you’re looking at a SIPP, or a personal pension from an insurance company, you’ll need to consider the range of investments available and associated charges. With a flat-fee platform like ii, your charges stay fixed, so your costs stay low as your pension pot grows.