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        Updated: April 23, 2024

        What are the Main Benefits of a Personal Pension?

        Still trying to decide if a personal pension is the right choice for you? Read our handy guide on all the pros and cons so you can make an informed decision.

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        We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions. Ask us a question and we'll get the best expert to help.

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        Most people would hope to have a higher income than the State Pension provides, and at £9,110.40 a year, or just £175.20 a week (for the year 2020-21) it’s no wonder many decide to use a personal pension to build up a bigger pot to retire on.

        Even if you are eligible for the full State Pension, it’s a good idea to make additional provision.

        However, you may want to know more about what benefits a personal pension may offer you before you make a financial commitment to setting one up.

        Which is why we’ve written this handy guide, where we answer the following questions:

        What are the main benefits of a personal pension?

        The advantages of a personal pension include…

        Tax benefits

        Think of a personal pension as a long-term savings plan which comes with the added benefit of tax relief. Whatever money you save into your pension will get tax relief so any contribution you make to your pension means more money in your pocket and less going to the government.

        There are also tax benefits when you retire.

        When you reach retirement age, 55 at the earliest, you can take 25% of your pension fund as a tax-free lump sum.

        The remaining funds will be paid to you as income and taxed at normal levels, depending on how much income you have in any one year.

        Anyone can contribute

        You can have a personal pension plan if you are employed, self-employed or not working. Along with any contributions you make, other people can also pay into your personal pension plan.

        If you are employed, your employer can make payments into your personal pension scheme.

        If you have a spouse who doesn’t work, you may decide to help them make provisions for their retirement by contributing to a pension they own.

        The same is true of a child, should you wish to help them get a head start in planning their long-term financial future.


        The majority of personal pensions are flexible and portable so if your circumstances change, you start a new job or you stop working you can continue contributing to the same plan.

        Guaranteed retirement income

        On retirement you can take 25% of your pension pot as a tax-free lump sum and draw the remaining funds as income directly from your pension pot. Drawing an income this way means that you may still be able to benefit from returns on the investment your pension is in.

        Another option is to use your pension funds to buy an annuity and provide a guaranteed income for your retirement years.

        Earn compound interest

        The earlier you start contributing to a pension, the more you can benefit from the compound interest you can earn. Whenever you make a payment into a pension you benefit from the tax relief and you also start making returns on the investment.

        In year one you’ll benefit from interest returns on your initial contribution. In the second year, you’ll earn interest on the initial contribution and the first-year return.

        By the third year you’ll be earning interest on your original contribution and two years of returns you’ve already accrued – these gains continue to multiply as you keep making your regular tax-free contributions.

        Which should, ultimately, add up to a healthy retirement pot.

        With the benefits of compound interest in mind, it’s also worth noting the benefits of being able to choose how your pension fund is invested.

        While different funds have varying risk profiles, it can be hugely profitable to pay some attention to how your pension is invested.

        Speak to a pensions expert to help you decide the best way to invest your pension and get an understanding of the contributions you should be making in order to provide your desired income in retirement.

        Speak to a expert today

        Are there any disadvantages?

        The potential drawbacks of a personal pension include…

        Lack of access

        The one fundamental drawback of a personal pension plan is that you can’t access it without incurring potentially damaging costs and fees before the age of 55. Plus, some plans don’t have access to Pension Freedom features and will need to be transferred if you want to do this when you reach this age.

        Read more about the difficulties of accessing your pension prior to the age of 55.

        Investment risks

        Your pension fund will be invested in bonds and other investments, or stocks and shares, if you have a higher appetite for risk.

        While you can mitigate the risks associated by seeking advice and making astute investment decisions, it’s impossible to guarantee that the investment your pension is in will perform as required and you could lose money if the investment fails to perform.

        Most financial investments come with the risk that the share price can fall as well as rise and this is something you have little control of once your investment is in place.

        However, since a pension is a long-term investment and even if you suffer losses, in the short term the long-term gains may outweigh any losses you incur.

        It’s complicated

        Pensions are a complicated topic and because they are a highly regulated financial product, they come with all kinds of rules and regulations.

        This can make it difficult for people to understand what they can and can’t do which can be off-putting, especially when pensions are designed as such a long term investment.

        When you’re in your twenties, retirement is still a long way off, making it easy to put off thinking about how you’ll provide an income when you stop working.

        Is a private pension worth having?

        For many people, the answer is yes. While pensions can be a complicated topic, there’s no denying the fact that most of us would like more income than the State Pension will provide in our retirement years. The tax benefits you get from both your contributions and the 25% tax-free lump sum on retirement are great reasons for some people to set up a personal pension, but keep in mind that this doesn’t apply to everyone.

        In order to establish whether a private pension is the right option for you, you’d need to speak to an expert about your needs and circumstances and discuss every possible alternative. Read on for more information about how to decide whether a personal pension is right for you, and what alternatives might be viable…

        Ask yourself whether you really need one

        It’s in no way obligatory to have a personal pension plan and if you have a pension through your employer, you may feel your retirement income needs are already covered.

        However, it’s always advisable to make sure you’re right in your assumption that your pension arrangements will deliver income at the rate desired rate in retirement.

        We work with expert pension advisors who offer a free pension review to customers. They will look at the pensions you have in place and let you know if you are on track for providing the income you need to retire on.

        Conversely, they will inform you if underperforming pensions mean you’ll find yourself with a shortfall.

        Make an enquiry and let us help you make sure your money is working as hard as you are.

        If you’re not convinced you want to get a personal pension you could consider alternate ways to provide income in your retirement.

        Invest in ISAs

        Since April 2017, it is possible to save as much as £20,000 per year into a cash or investment ISA. ISAs allow you to save money tax free and when you’re ready to make withdrawals from your fund, the money you take is also free of tax.

        ISAs also come with the added benefit of allowing far more control over how your money is invested, as well as how and when you withdraw your funds.

        This has some potential drawbacks.

        Once you withdraw and spend the funds, there is no more cash to fall back on. You may need to plan your spending with care to ensure the available funds will last as long as you need in retirement.

        If you die, any funds you still have money invested in ISAs will automatically form part of your estate and go to your beneficiaries. If you buy an annuity with your pension fund, rather than choosing drawdown like most people do, the annuity benefits die with you, even if you have only been retired for a year.

        Invest in property

        There are a couple of ways you can secure an income for your retirement by investing in property during your working life.

        Work your way up the property ladder and downsize when you retire and use the lump sum from the sale as income in the years to come.

        The potential downside of this is that property prices can fall as well as rise and there’s no guarantee that you’ll get the price you need when it comes to needing to sell up.

        The other option is to invest in a portfolio of buy-to-let properties. In retirement, you can choose to live off the rental income you are getting, if it’s reliable enough, or sell the properties and take an income from the profit you make on the sale of the portfolio.

        If investing in property is of interest, you could consider a SIPP arrangement and wrap your property portfolio in a SIPP wrapper, meaning you’ll gain all the tax advantages of a pension and the potential investment gains of property.

        Is it worth it if I have a company pension?

        If you have a pension through your employer you may consider that your retirement needs are taken care of.

        However, pension investments and performance can vary between providers and there’s no guarantee that the pension offered by your employer will give you the income you need to retire comfortably.

        If you would like to talk to an expert about any aspects of your retirement planning, get in touch for a free, no obligation chat and we’ll connect you with one of the independent pension experts we work with.

        They will be able to assess the pension – or pensions – you hold and help you understand whether your expectations align with how your pension funds are actually performing.

        Are there any other problems or risks I should know about?

        The main risk associated with having a personal pension is an underperforming fund.

        It’s important to review your pension arrangements regularly to ensure your investments are performing well and that the fees you’re paying aren’t eating into your pension pot and eroding the pension income you hope to receive in retirement.

        If you have multiple pensions from different providers, it may be worth consolidating them into one.

        By doing this you could benefit from:

        • Being able to track and manage your pension investments more easily
        • Potentially lower costs if you can transfer from a high-cost plan to a pension scheme with lower costs and fees
        • Being able to choose from a wider investment choice if you consolidate all your pensions into one flexible scheme
        • Adding Pension Freedom features to plans that don’t have them

        Speak to an expert

        Retirement planning can feel overwhelming and you may find it useful to get advice from an expert, like those we work with.

        There are many rules and regulations surrounding what you can and can’t do when it comes to your pension arrangements so it can help to talk to someone who deals with pensions every day.

        Call 0808 189 0463 or make an enquiry for a free, no obligation chat and we’ll match you with one of the pension experts we work with.

        All the experts are independent financial advisors with access to all the pension providers in the UK

        Ask A Quick Question

        We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions. Ask us a question and we'll get the best expert to help.

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        Richard Angliss

        Richard Angliss

        Finance Expert

        About the author

        Richard Angliss has made a career in financial services which stretches over 40 years.

        His early career was spent learning about the various financial products and applying them to prudent advice, working for one of the largest life assurance and investment firms. After that he joined the financial services arm of a very well-known firm providing independent advice to their 8 million customers.

        For the last 20 years he has been involved in building software solutions that help Advisers and clients work together to achieve good financial outcomes and helping to set up three independent advisory firms. He also has written many articles for financial services publications and provided commentary for newspaper journalists.

        At an early stage in his career he realised the great satisfaction that comes with being able to help people achieve their goals and protect their families. “Regulation of financial services has hugely impacted on ensuring people get appropriate advice. The issue these days is access to that advice and just as importantly regular reviews to make sure that everything stays on track”.

        With the growing development of online resources such as Online Money Advisor he sees a great future for people to access advice to make their pension and investment work harder for them.  Plus, of course, to ensure they have insurance products in place that will be required when unforeseen events happen.

        He knows getting that balance right is crucial to prudent financial planning and the wellbeing of individuals and their families.

        FCA Disclaimer

        *Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us as well as any of our own are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

        Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.