What is a personal pension?

A personal pension is a way of making regular savings for your retirement. You can get a personal pension from financial services companies such as insurance companies, banks, investment companies and building societies. You usually pay into the personal pension every month, and if you are an employee, your employer can also contribute to your pension. The money in your pension fund is invested to pay for a regular income when you are older. But you may also have to pay charges to your personal pension provider.

You will usually get tax relief on your contributions to a personal pension. This tax relief is available to everyone who pays into a personal pension, even those who do not pay tax. With a basic rate of income tax of 22%, every £100 that goes into your pension costs you £78 (based on the tax year 2004/05). If you pay income tax at the higher rate of 40%, you can claim back the tax difference (compared with the basic rate of income tax) from the Inland Revenue. So, with the higher rate of income tax at 40%, every £100 that goes into your pension fund costs you £60 (based on the tax year 2004/05).

You can also arrange for part of your National Insurance contributions to be paid into your personal pension. This is explained in more detail here.