Personal pensions

Stakeholder and personal pensions

A personal pension plan, sometimes referred to as a private pension, is a way of saving for your retirement. They are a form of ‘defined contribution’ or ‘money purchase’ pension. This means that you pay money in, usually with tax relief, to build your pension pot. 

You can set one up yourself, through a pension provider, and invest in it personally. The amount you will get from your personal pension will depend on how much you have paid in, how your pension investments perform (that is, whether the value of the investments goes up or down), and the amount of fees charged within the pension plan.  

Personal pensions may be set up by self-employed people. However, if you are employed, your employer is required by law to offer a workplace pension scheme. The employer must automatically enrol eligible employees into the pension scheme and make contributions to it. A group personal pension scheme is a type of workplace pension that your employer may offer, and they may also pay into it. 

Usually, contributions to personal pensions should be made from UK relevant earnings. However, even if you do not have any earned income, for example, income from employment or self-employment, you may be able to invest up to £3,600 gross each tax year in a personal pension and get tax relief on it. You can read more about this on our page Tax relief on pension contributions.

You can get a personal pension from financial services companies such as insurance companies, bank and building societies. These are known as pension 'providers'.

The pension provider invests the funds in the scheme, to pay your pension when you retire or decide to take money out (though there are restrictions on when you can do so). 

Rebate only and appropriate personal pensions

Until 5 April 2016 it was possible to 'contract out' (that is, opt out) of the state second pension and state earnings-related pension scheme.

If you contracted out using a personal pension scheme, HMRC paid some of your National Insurance contributions to a personal pension of your choice. This type of personal pension was called an appropriate personal pension.

The amount of the rebate from HMRC to your appropriate personal pension scheme depended on your age and your earnings.

The HMRC payment was called the minimum contribution and was paid once your earnings were known at the end of the tax year.

If you contracted out of the state second pension and you earned less than a set limit, you also got a top-up to the minimum contribution paid into your appropriate personal pension. You could also make additional payments of your own to an appropriate personal pension.

Some personal pensions were 'rebate only' which meant that the only money paid into the scheme was the National Insurance rebate. This type of personal pension was just intended to replace the additional state pension.

Retirement annuity schemes

If you took out a personal pension before 1 July 1988, it would have been called a retirement annuity policy. These policies are sometimes referred to as a RAP, retirement annuity contract, or RAC. Quite often, these were linked to life insurance policies and any payments to the insurance policies were also treated as being pension payments.

If you are still making payments to a retirement annuity policy you will need to check if you need to claim tax relief. Contributions are usually made gross, which means that usually no tax relief is added to the pension pot in connection with the payments made. This differs from personal pension contributions, which are usually made under the relief at source method. You may still be entitled to tax relief on payments to retirement annuity policies, but you need to get the relief through your PAYE coding notice or your Self Assessment tax return.

If you are getting tax relief through your PAYE tax code, the full amount of the payments you are making will be shown as an allowance on your coding. This means you are deducting that amount from your income and only paying tax on the balance of your income.

If you pay your tax through Self Assessment – for example, because you are self-employed – you must include the full amount of your payments to retirement annuity policies on your tax return. If you are entitled to any tax relief it will be given to you through your tax calculation for the year in question.

You can read more about retirement annuity contracts on the government’s Moneyhelper website.