Personal Pension Plans Explained

Published / Last Updated on 18/05/2023

Personal Pension Plans

Personal Pension Plans were introduced on 1 July 1988.  They replaced the older style pension plans called Retirement Annuity Policies (sometimes known as s226 or s620 plans).

'Simplified' Pension Rules after 6 April 2006:

Who can have a personal pension plan? 

Under Pension Simplification rules you are now eligible to contribute to such a plan if you are:

  • A UK employer paying contributions for an employee.
  • A UK Relevant Individual and receive tax relief on contributions made.
  • A UK resident non-taxpayer, pensioner, low earner and even children can get tax relief on pension contributions.  The maximum a non-taxpayer can pay in is £2,880 pa net which is made up to £3,600 pa with tax relief at basic rate tax added.
  • Overseas Resident: 
    • Non-residents can open a new UK personal pension plan (if the UK pension provider and your country's local laws allow).  Many counties, particularly after Brexit will not allow a new UK pension for one of their residents and most pension providers will not accept non-residents.
    • Non-residents that used to live and work in the UK and have an existing personal pension can pay into their existing UK personal pension plan for up to 5 years and receive tax relief.  The maximum a non-tax resident can pay in is the same as UK resident non-taxpayers i.e., £2,880 pa net which is made up to £3,600 pa with tax relief at basic rate tax added.

What can I pay into a personal pension plan?

You are allowed to contribute premiums to as many Personal Pension plans or indeed any other pension plans as you want up to the Annual Allowance.  The Annual Allowance started in 2006/07 at £200,000 pa.  This has been reduced over the years to stop higher earners avoiding income taxes by paying huge amounts in pension contributions to reclaim tax relief and reduce their earnings.

The current maximum you can pay into a pension for tax year 06/04/2024 to 05/04/2025 is the lower of:

  • Your yearly earnings or
  • £60,000.00.

See: Annual Allowance

You may also be able to pay more in than the above using Carry Forward (of previous 3 years unused tax relief allowances), see: Carry Forward TYE 22/23

How much should I save in my personal pension plan?

This is a personal choice based on what you can afford.  See How Much?

We have also produced a number of calculators to help you decide and you should try them to see if they help you using our Financial Calculators.

What happens to my money that I have paid in? 

Your pension money is invested normally in collective funds with other pension savers.  You technically buy shares known as 'units' in the pension fund.  Pension funds invest in a wide range of areas such as cash, property, fixed interest stock, bonds, shares, overseas shares and many more. 

How does my personal pension plan fund grow? 

If the value of an asset owned by the pension fund goes up in value e.g.  a Shopping centre owned by a pension property fund, then the 'unit price' value of your 'shares' or 'units' in that fund goes up.  This is the same if you hold stocks and shares funds, when the value of company shares goes up in the fund, your pension fund value will rise.  Equally, when values fall, your pension fund value will fall.

When can I retire from a personal pension plan? 

You can retire from this type of scheme after the age of 50 until April 2010 and age 55 after April 2010.  This increases to age 57 in April 2028.

What is the maximum pension I can receive when I retire? Lifetime Allowance LTA

There is no maximum pension you can receive but there is a maximum amount you can build up in pension funds (or equivalent) during your lifetime before you started to get additional tax penalties for exceeding the limit.  This is called the Lifetime Allowance (LTA) and currently for tax year 06/04/2024 to 05/04/2025 it stands at £1,073,100.00 however, there are no longer any penalties for exceeding this limit (Spring Budget 2023).

see Lifetime Allowance

What happens to my personal pension plan at retirement?

Pension Lump Sum: At retirement you are allowed to receive a lump sum of 25% of the fund value (now capped from April 2023 at 25% of the Lifetime Allowance [£1,073,100] = £268,275) unless you have a protected higher cash value.  The lump sum is tax free in the UK but if you live overseas, it may be taxable where you live.  The balance of the fund after taking any lump sum can then be used to purchase a retirement income.

Pension Income: There are two types of income style at the chosen retirement date; some options are riskier than others: 

  • Lower Risk - Secured Income (an annuity) - usually your pension buys a guaranteed annual pension income for life.  Think of it like investing money in a bank account but you cannot have the money back and you receive guaranteed income on the money you invested for the rest of your life. 
  • Medium and Higher Risk - Unsecured Income (Flexible Drawdown) - your money stays invested in pension funds as normal that can go down as well as up in value but you can draw down as much or as little income or lump sums from the pension fund as you want, whenever you want.

We suggest most people should have at least a combination of their minimum 'subsistence' expenses i.e., money needed to cover all bills in secure, lower risk, guaranteed pensions, annuities and state pensions with any balance above this used to buy more annuity income or in flexible drawdown.

Learn all about your 'At Retirement' Options.

What happens if I die? 

If you die before you have retired i.e., not taken income or lump sums from your pension your heirs will normally receive the whole pension fund as a lump sum tax free in the UK.  There may be taxes payable where you live if you are outside the UK.

If you die and you are already receiving benefits, cash or pension income or both, if it is:

  • Secured Income (Annuity) your heirs may or may not be able to receive a balance of the fund paid depending upon the type of annuity you invested in.
    • If you have a spouse's benefit built into the annuity, your spouse will receive the % of pension income available e.g.  50% spouse's benefit.
    • Guarantee options:  If you have a guarantee attached to the annuity e.g., 5 year guarantee/10 year guarantee they will get the balance of any pension annuity income outstanding up to the guarantee period as a lump sum. 
    • If there is no guarantee, they will usually receive nothing.
  • Unsecured Income (Flexible Drawdown), your heirs receive the balance of the pension fund remaining. 
    • If you die before age 75, they will inherit the complete pension fund tax free (if in UK). 
    • If you die after age 75, they will inherit the whole pension fund but will pay income taxes at their own normal rates when they drawdown an income.

Can I have Life Insurance Cover? No

The 2006 Pension Simplification changes stopped Personal Pension Plan providers offering Personal Pension Plan life cover as tax relief on the life insurance premiums was withdrawn so it became pointless using up your pensions annual contributions allowance to pay for life cover.  It used to be that the premiums you paid for life insurance received tax relief on the premiums making them cheaper.

What is a waiver of premium benefit? 

This is offered by some pension providers as a bolt on option to your personal pension but usually you must select it when you start the pension.  Usually, it cannot be added later.  This valuable benefit will pay the premiums on your pension policy if you are unable to work due to long term illness.  Upon illness, the ongoing pension premiums are waived by the company but are deemed to have been paid by you.  This cover is inexpensive and ensures that your pension continues uninterrupted.  There is usually a deferred period before this type of benefit is paid and can be between three and six months.  The pension provider will expect you to pay the premiums during the deferred period.  The cost for this benefit can normally be deducted from the overall premium you pay without having to make a separate premium contribution.  You should, however, make an allowance for this and increase your overall contribution to ensure that your retirement benefits are not reduced.


Old Rules Before 6 April 2006:

You were eligible to contribute to such a plan if you are an employee, director or self employed person living in the United Kingdom and were not members of a Company Occupational Pension Scheme with higher salaries.  

You were allowed to contribute to a Personal Pension plan if you had relevant earnings.  Relevant earnings were things like taxable pay, maternity pay, statutory sick pay, taxable benefits in kind such as a company cars.

You were not allowed to take out a personal pension if you were a member of a Company Occupational Pension Scheme as your earnings may be linked to that pension scheme and therefore are NOT relevant.

NB: Some people were able to be both members of an Occupational Scheme and a Personal Pension - e.g.  if you had two employments.  There were also special rules for General Practitioners of Medicine or Dentistry under Statutory Concession A9 which allowed for membership and special tax relief rules.  You should contact us for guidance on this.

Maximum Contributions - The maximum you were able to contribute was linked to your earnings and your age.

% of Salary Allowed to contribute to the pension based upon your age at the start of the tax year - April 6th

Aged 35 or less a maximum of 17.5%

Aged 36 - 45 a maximum of 20%

Aged 46 - 50 a maximum of 25%

Aged 51 - 55 a maximum of 30%

Aged 56 - 60 a maximum of 35%

Aged 61 - 74 a maximum of 40% 

For example, if your date of birth was 26/7/66.  Then your age at the start of this tax year 03/04 was 36 years.  Therefore, you were able contribute up to 20% of your earnings to a personal pension plan.

Cessation and Presumption of Earnings  - Under rules introduced in April 2001, you were able to contribute more than the above % if earnings in previous years were higher.

Earnings Cap  - The maximum salary allowed for calculations was subject to a maximum cap on earnings.  For the full list of earnings caps since 1989 - visit the company schemes pages.


You received tax relief on contributions that you made to the plan.  See Tax Benefits.  Contributions were, and still are, paid net of basic rate tax for employees and self employed.  If you were a higher rate tax payer, marginal rate relief (the 18% difference between basic rate tax - 22% and higher rate tax - 40%) was collected normally via your tax code or self assessment return.

You were able to retire between the ages of 50 and 75.

If you had a special occupation such as a sports person you were able to retire earlier say from 35.  This tax free sum may be lower if you have transferred pensions in from other pension policies.

Life Cover

You were able to take out Life Assurance Cover as part of your personal pension plan and obtain things like tax relief on the contributions but this was restricted to certain limits on the amount you could pay in premiums.

Get help with your personal pension plan arrangements, speak to an adviser today.

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