Pensions provide a tax -efficient way of saving and are key to securing your lifestyle during retirement.
There are different types of pensions available, so you can choose what suits your circumstances. The most talked about pensions are usually the State Pension and the Workplace Pension. Other pension types are available – read on to learn more about how they could benefit you.
Pension types
Defined Contribution (DC) schemes: also known as a ‘money purchase scheme’, the benefit (or ‘pension’) is based upon the value of the plan at retirement. These pensions are often ‘personal pensions’ or ‘Self Invested Personal Pension Plans’ (‘SIPPs’). The future value is determined by the amount paid over the lifetime of the plan and the performance of the chosen investment funds.
Defined Benefit (DB) schemes: commonly referred to as ‘final salary’ pensions, build a guaranteed income at the scheme retirement age, based upon years of service and salary, though new schemes in the private sector are rare.
Workplace pensions: All employers must offer a workplace pension by law and automatically enroll employees to enable pension contributions to be paid by the employee, the employer and the government. These are commonly set up as a ‘DC’ scheme.
Tax benefits
"Contributions to pension schemes, where meeting certain criteria, can reduce your taxable earnings and therefore your marginal rate of tax, with basic rate tax relief applied within the pension, and tax relief at higher or additional rates being reclaimed via your tax return (unless paying via your workplace pension with a ‘net pay arrangement’ or ‘salary exchange’, in which case no tax return is required). "
"Growth within a pension is free from both capital gains tax and income tax."
Growing your defined contribution pension fund
Various investments can be held within a pension. For typical pensions set up by workplaces, or group personal pensions, a range of funds are available to choose from – though often limited. Some will be sector or asset class specific, and some will be risk-rated funds.
Some pension contracts are structured as Self-Invested Personal Pensions (SIPPs), whereby a greater range of underlying investments can be held, including direct shares, and potentially commercial property.
Benefits of contributions
Personal contributions present tax savings by reducing your taxable earnings, with basic rate tax relief applied within the pension, and higher rates of relief claimed via your tax return.
If, for example you earn £200,000 and wish to make a £50,000 personal pension contribution.
Slightly higher rates of tax relief on contributions can be achieved if your employer will allow you to exchange your salary into a pension, reducing your gross earnings and what is assessable for National Insurance. There are some potential disadvantages to this and the suitable option is specific to your personal circumstances.
Pension annual allowance
The amount of tax relief is limited to a gross pension contribution based on the lower of your UK relevant earnings, or £60,000 per tax year (2025/26).
If you have no employment earnings, you are restricted to £2,880 net (£3,600 gross).
The tapered annual allowance reduces the pension allowance for higher earners. Where your earnings are higher than £260,000 (adjusted Income) in a tax year, the £60,000 annual allowance is reduced by £1 for every £2 of earnings in excess, down to a minimum of £10,000. ‘Threshold income’ (which excludes pension contributions) also needs to be above £200,000 for tapering to start.
It’s also possible, in some cases, to ‘carry forward’ unused pension allowances from the previous 3 tax years.
Rules for company owners
For limited companies, Directors can choose to make pension contributions for themselves, as well as their employees. Making contributions as a Director to your own pension is a very tax efficient way of extracting capital from the business. Pension contributions are deemed to be allowable expenses where made ‘wholly and exclusively‘ for the purposes of the business, therefore reducing corporation tax.
It’s important to remember that Director contributions are still restricted to the pension annual allowance of £60,000 (2025/26).
Pension Age
Private pensions (including workplace pensions) can be accessed from the age of 55, but this will rise to 57 in April 2028. You can only take your state pension when you reach your specific state pension age.
The pension access age for Defined Benefit pensions is subject to the scheme rules.
Key considerations
Pension contributions are generally a very tax efficient way to save for retirement.
When accessing your pension, 25% of the fund is currently available as ‘tax free cash’ subject to an upper limit of £268,275. The remainder can be withdrawn, taxable at marginal rates of income tax, potentially giving a degree of control as to how much tax you pay in retirement if you also have other sources of income.
You can use your pension assets to purchase a guaranteed income, called an ‘annuity’, so to avoid relying on investment returns to produce a sustainable income in retirement.
Pensions above the historic lifetime allowance may be subject to additional tax charges on death.
Whilst the same tax rules generally apply to most pension contracts (aside from some older pensions that have protections or guarantees in place), other features such as investment range, the ways in which they can be accessed, cost and administration, do differ greatly between providers. It is therefore worth reviewing these with a financial adviser to check whether the pension best meets your needs.
At the time of writing, pensions are outside of the estate for Inheritance Tax (IHT) purposes.
As announced at the Autumn Budget 2024, from 6 April 2027 most unused pension funds and death benefits will be included within the value of a person’s estate for Inheritance Tax purposes.
Whilst the same tax rules generally apply to most pension contracts (aside from some older pensions that have protections or guarantees in place), other features such as investment range, the ways in which they can be accessed, cost and administration, do differ greatly between providers.
MHA can help
To discuss any of the issues raised in this article, please contact the author Charlotte Elgar who will be happy to assist.
Should you need assistance with your financial planning, please contact our wealth management team.
This insight is part of our Pensions Awareness Hub
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This communication is for general information only, is a marketing communication, and is not intended to be individual investment advice, a recommendation, tax, or legal advice. The views expressed in this article are those of MHA Wealth or its staff and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. In particular, the information provided will not address your personal circumstances, objectives, and attitude towards risk.
This information represents our understanding at the time of publication of current law and HM Revenue & Customs practice. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. You are therefore recommended to seek professional regulated advice before taking any action.
Key Risks: Capital at risk. Past performance is not a guide to future performance. The value of an investment and the income generated from it can go down as well as up, and is not guaranteed, therefore you may not get back the amount originally invested.
Investment markets and conditions can change rapidly. Investments should always be considered long term.
This Information represents our understanding of current law and HM Revenue & Customs practice as at 01/09/2025. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.
In particular, the information provided will not address your personal circumstances, objectives, and attitude towards risk. Therefore, you are recommended to seek professional regulated advice before taking any action.
Past performance is no guarantee of future returns. The price of units and the income from them can fall as well as rise.
Please be aware that there may be occasions when an individual fund or funds may have a higher risk rating than your overall stated attitude to risk. If this is the case, then the overall risk rating applied to all of the combined funds being recommended is still designed to meet your stated tolerance. Tax rules are subject to change.
