Personal Pensions

Personal Pensions are there to top-up the pension benefits you receive from the State and from periods of employment.

The Finance Act 1956 created the option for persons who were not eligible for an employer’s pension scheme, to set up a ‘tax relieved’ Retirement Annuity Contract. Retirement annuities were superseded by personal pension plans in 1988.


In 2001 Stakeholder Pensions were introduced, aimed at low earners to encourage long-term saving for retirement. In 2006, for those at the other end of the income scale, self-invested personal pensions (SIPPs) were introduced offering greater investment flexibility than ordinary personal pensions.

Think about this

A 66 year old currently (2022/23) has a personal allowance of £12,570 pa and income up to that amount is not taxed.  The new State Pension is currently £185.15 a week = £9,627 pa. 

An RPI linked annuity from a personal pension to provide the difference (ie £2,942 pa) for a single person would require a pension fund of around £100,000.  However, as most people want to take the full tax-free cash amount the fund would need to be around £125,000. A married person wanting to leave an ongoing annuity to their spouse would require a pension fund after allowing for tax free cash of around £163,000.

Whilst the contributions to build such a fund would have attracted tax relief at source, the fund could provide the 66 year old in our example with a tax-free lump sum followed in effect by a tax-free annuity.  Of course, for a couple in this situation we could look at a fund of  between £125,000 to £163,000 for each of them.

The current pensions regime

This commenced on 6 April 2006.  It was the most radical shake-up to tax and other rules governing pensions within the UK for well over a decade. 

The intention was to have one universal tax regime for all pension products which would replace at least eight different sets of tax legislation that previously applied to pension schemes.  In particular it removed many of the differences between occupational pensions and personal pensions.  

Retirement Age

The earliest age at which your benefits can be taken was raised from 50 to 55 from April 2010.  It is due to be raised again from 55 to 57 from April 2028. Earlier retirement on the grounds of incapacity will still be permitted.

The concept of a ‘normal retirement date’ will no longer apply.  You will be able to take all, or part, of your pension benefits even if you are still in the employment to which the scheme relates.

Retirement benefits

You will be able to take tax-free cash, technically referred to as a ‘pension commencement lump sum (PCLS)’ from your pension fund up to a maximum of 25%.  The overall maximum tax free cash is 25% of the ‘standard lifetime allowance’ less any tax-free cash benefits that you have already taken irrespective of whether you took these before or after 6 April 2006. 

You can take your pension benefits by purchasing a ‘secured pension’, that is an annuity, or purchasing a pension drawdown product (previously referred to as an ‘unsecured pension’).  There are now so-called ‘third way’ products which are a half-way house between the two.

Pension benefits do not have to commence by age 75. The tax rules permit benefits to commence after age 75, including as a pension commencement lump sum.  All accrued funds or rights not crystallised by a member’s 75th birthday are crystallised for lifetime allowance purposes at that time.

Eligibility for tax relief

Only ‘relevant UK individuals’ under age 75 are eligible to obtain tax relief on their contributions, i.e. those who:

  • are resident in the UK at some time during that tax year, or
  • have earnings chargeable to UK tax at some time during that tax year, or
  • were resident in the UK when they became a member of the pension scheme and at some time in the previous five tax years, or
  • either they, or their spouse, have earnings from overseas Crown employment subject to UK tax at some time during that tax year.

Obtaining tax relief

Basic rate tax relief (currently 20%) is allowed for when you pay your contributions.  If you are eligible for higher rate or additional rate tax relief you will claim this via your self assessment tax return.

The exceptions to this are old retirement annuity contracts (also referred to as ‘Section 226’ plans) and occupational pension schemes operating a ‘net pay’ arrangement.

If you have earnings in excess of the ‘Annual Allowance’ (see below) and make contributions of 100% of your earnings you will still be entitled to tax relief on the contribution.  However, you will incur a tax liability.

An employer is entitled to relief on contributions up to the Annual Allowance provided they satisfy the ‘wholly and exclusively for business’ test.

Annual Allowance

The annual allowance is the maximum amount of pension saving you can make each year that benefit from tax relief. This includes pension savings that you make plus any made by someone else on your behalf – for example, your employer. If your pension saving are more than the annual allowance you will pay a tax charge on the amount over the annual allowance. This tax charge is called the annual allowance charge.

The annual allowance for 2022/23 is £40,000.  However depending on your income this may be reduced (see below).

The annual allowance is designed to restrict your ‘total pension input’.  For your ‘money purchase’ benefits from either your employer’s occupational pension scheme or your private pension plans this is the total contributions paid.  For your ‘final salary’ benefits from your employer’s occupational pension scheme you should use a factor of £16 capital for each additional £1 of accrued pension.

Example – A local government employee’s final salary pension entitlement from the Local Government Pension Scheme has increased from £36,000 pa to £37,500 pa in the last year.  He has also contributed £10,000 pa to a personal pension plan.  His ‘total pension input’ is calculated as (16 x £1,500) + £10,000 = £34,000, which is within the Annual Allowance.

The annual allowance is subject to a 50% taper down to a minimum of £10,000 based on ‘adjusted income’ in excess of £150,000 if ‘threshold income’ exceeds £110,000.

The annual allowance is subject to a 50% taper down to a minimum of £4,000 based on ‘adjusted income’ in excess of £240,000 if ‘threshold income’ exceeds £200,000.

Lifetime Allowance

There is no limit on the total amount of authorised benefits a registered pension scheme can provide to its members.  An individual has a single lifetime allowance on the value of tax privileged benefits they can draw from such schemes. The value of any authorised benefits paid out to an individual in excess of their allowance is subject to a tax charge. This applies to all types of registered pension scheme equally.

The lifetime allowance for the tax year 2022/23 is £1,073,100.  This amount is now frozen for a few years.

Immediately before you take your retirement benefits they will be tested against the lifetime allowance. 

When your pension comes into payment, any funds in excess of this limit will be taxed at 25% if the excess funds are to be used to provide you with pension benefits, or 55% if taken as cash.  You can take all the excess funds as cash.  Whilst the tax on the excess pension benefits appears to be more advantageous than the tax on the excess cash, you should not overlook the fact that the excess pension benefits will then still be treated as taxable income.

How to start a pension if you are self employed

If you are self employed then it is up to you to do something about your pension funding as you have no employer to help you. If you are not using the services of a financial adviser one of the best places to look at before you choose your personal pension is the Boring Money Pension Best Buy List

I have also set up a page specifically for those who want to know how to start a pension if you are self employed, perhaps initially by contributing a relatively small monthly amount.



This information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.

Information given relating to tax legislation is based on my understanding of legislation and practice currently in force. Whilst I believe my interpretation of current law and practice to be correct in these areas, I cannot be responsible for the effects of any future legislation or any change in interpretation or treatment. In particular you are warned that levels of tax and tax reliefs are subject to alteration and, in any case, the value of such reliefs and benefits may depend on an individual’s circumstances.

If you are in any doubt as to whether any course of action is suitable for you, then you should discuss the matter with a suitably qualified independent financial adviser or other specialist.