Key numbers for 2025/26
How UK pensions work
A pension is a long-term savings account with significant tax advantages. The core benefit is tax relief on contributions: money you pay in is topped up by the government at your marginal income tax rate. A basic rate taxpayer putting in £80 receives £100 in their pension. A higher rate taxpayer putting in £60 can claim back enough to effectively pay just £60 for the same £100 invested.
Inside a pension, your money is invested — usually in a mix of shares, bonds, and other assets — and grows free of income tax and capital gains tax. When you eventually draw it down, the first 25% can be taken tax-free (up to the £268,275 lump sum allowance), and the rest is taxed as income in the year you take it.
This combination of tax relief going in, tax-free growth inside, and a 25% tax-free lump sum on the way out makes pensions the most tax-efficient savings vehicle available to most UK workers — significantly better than an ISA for higher rate taxpayers during their earning years.
Types of pension
Workplace pension (defined contribution)
The most common type for private sector workers. Both you and your employer contribute to a pot that is invested in funds of your choosing. The value at retirement depends on what goes in and how the investments perform. Under auto-enrolment, employers must contribute at least 3% of qualifying earnings, and employees at least 5% — making a combined 8% minimum. Many employers will match higher contributions if you increase your own.
Defined benefit pension
A defined benefit (DB) or final salary pension promises a specific retirement income based on your salary and length of service. These are now rare in the private sector but remain common in the public sector (NHS, teachers, civil service). DB pensions are extremely valuable — they provide a guaranteed, inflation-linked income for life — and are protected by the Pension Protection Fund if an employer goes bust.
Personal pension / SIPP
A personal pension or Self-Invested Personal Pension (SIPP) is a private arrangement not tied to an employer. SIPPs allow you to choose from a wider range of investments. They are popular with the self-employed, those who want to consolidate old workplace pensions, and investors who want more control. Contributions receive the same tax relief as any other pension.
State pension
The new state pension for 2025/26 is £11,502.40 per year (£221.20 per week), after a 4.1% triple lock increase. It is paid from age 66 (rising to 67 between 2026–28). To receive the full amount, you need 35 qualifying years of National Insurance contributions or credits. A minimum of 10 qualifying years is needed to receive anything. You can check your forecast at GOV.UK.
How much to save
The most widely-cited rule of thumb is the "half your age" rule: take the age at which you start saving, halve it, and that is the percentage of your pre-tax salary you should be saving across employer and employee contributions. Starting at 22 means saving 11%; starting at 40 means 20%. It is a rough guide, but it captures an important truth — starting earlier is dramatically more efficient due to compound growth.
Example: Someone saving £500/month from age 25 to 67 at 5% annual growth accumulates roughly £770,000. Starting at 35 — just 10 years later — and saving the same amount produces roughly £420,000. The 10-year head start is worth more than £350,000. Use the Retirement Planner to model your own numbers.
The minimum auto-enrolment rate of 8% combined is generally not enough for a comfortable retirement unless you start very young or receive a generous employer contribution. Aim for at least 12–15% of salary across your working life if you want to retire at or before state pension age.
The annual allowance
The annual allowance for 2025/26 is £60,000, or 100% of your earnings — whichever is lower. This is the total that can be contributed to all your pensions (across all schemes) in a tax year while receiving tax relief. It includes both employer and employee contributions.
If you have not used your full annual allowance in the three previous tax years, you can carry forward any unused allowance and make larger contributions in the current year. This is particularly useful for variable-income earners or those who want to make a one-off large contribution.
Tapered annual allowance
High earners may face a reduced annual allowance. If your adjusted income (total income including employer pension contributions) exceeds £260,000, your annual allowance is reduced by £1 for every £2 of adjusted income above that threshold. The minimum tapered allowance is £10,000. Anyone approaching the £260,000 threshold should take specialist advice.
Money purchase annual allowance (MPAA)
Once you start flexibly drawing down from a defined contribution pension (taking variable amounts rather than a fixed annuity), your annual allowance for further DC contributions is reduced to £10,000. This is designed to prevent recycling — taking money out and putting it back in to claim fresh tax relief.
Tax relief on contributions
| Tax rate | You pay in | Pension receives | Effective cost per £100 |
|---|---|---|---|
| Basic rate (20%) | £80 | £100 | £80 |
| Higher rate (40%) | £60 (after SA claim) | £100 | £60 |
| Additional rate (45%) | £55 (after SA claim) | £100 | £55 |
Basic rate tax relief is added automatically by the pension provider under relief at source. Higher rate and additional rate taxpayers must claim the extra relief through Self Assessment. Via salary sacrifice, the relief is even more efficient as you also save on National Insurance.
Taking your pension
You can access a private pension from age 55 (rising to 57 in April 2028). You are not required to stop working to do so. The main options when taking a DC pension are:
- Lump sum: Take the whole pot. The first 25% (up to £268,275) is tax-free; the rest is taxed as income — potentially at higher rates if taken in a single year.
- Flexible drawdown: Move the pot into a drawdown fund and withdraw money as needed. The 25% tax-free entitlement can be taken upfront or spread across withdrawals.
- Annuity: Exchange the pot for a guaranteed income for life from an insurance company. Rates have improved significantly since 2022 as interest rates rose.
- Combination: Most retirees use a mix — some annuity for a guaranteed income floor, some drawdown for flexibility.
The state pension cannot be taken early — it is payable from state pension age regardless. You can defer it to receive a higher weekly amount (1% more for every nine weeks you defer, equating to roughly 5.8% per year).
What happens to your pension when you die?
Defined contribution pensions do not currently form part of your estate for inheritance tax purposes (though this is proposed to change from April 2027). You can nominate who you want to receive your pension pot, and the trustees of the scheme will normally follow your wishes. If you die before age 75, the beneficiary can usually receive the whole pot tax-free. After age 75, the money is taxed as their income when they withdraw it. This makes pensions a powerful tool for passing wealth across generations while minimising IHT — for now.
Estimate inheritance tax on your estate → IHT Calculator