We all know we should have one, but “future you” can deal with this, right?! Annoyingly, pensions are one for the long game: better planning now means less worrying later. And honestly, it’s not as complicated as everyone makes out (sometimes).
Pensions are an important part of retirement planning and can provide a source of income in later life. In the UK there are several types, each with its own features and benefits.
🏛️Government
State Pension
A government-funded pension that provides a basic level of income in retirement.
It’s based on your National Insurance record: you usually need at least 10 qualifying years to get any new State Pension, and 35 for the full amount.
🔒Employer promise
Defined Benefit Pension
A workplace pension where your employer promises a guaranteed income for life, based on your salary and length of service.
Becoming less common in the UK, but a stable source of retirement income.
📈Invested pot
Defined Contribution Pension
A workplace pension where you and/or your employer make regular contributions to a pension pot.
The pot is invested in a range of assets such as stocks, bonds and property (see Investments for the basics of risk and choosing investments).
Your final income depends on how much has been paid in and how well the investments perform.
🧳You set it up
Personal Pension
A type of defined contribution pension that you set up yourself.
You make regular contributions to a pot that is invested in a range of assets.
Flexible and portable, so you can take it with you if you change jobs.
🎛️More control
Self-Invested Personal Pension (SIPP)
A personal pension that gives you greater control over how your pot is invested.
Choose from a wider range of options, including shares, commercial property and alternative investments.
🏢Employer
Workplace Pension
A pension set up by an employer for their employees.
Employers must automatically enrol eligible workers into a workplace pension scheme and pay into it.
Workplace pension: the auto-enrolment minimum
Employer3%You + tax reliefthe rest
The current minimum is usually 8% of qualifying earnings in total. Always check The Pensions Regulator or GOV.UK for the latest rules.
Useful links:Citizens Advice have some further advice when choosing a personal pension.
🔗
Combining pensions
Combining (or consolidating) pensions means transferring multiple pension funds into a single plan. The decision has advantages and disadvantages, which are set out below.
Pros
Simplification. Fewer plans to manage, and an easier way to track your savings and adjust your investment strategy.
Cost savings. Multiple plans can mean higher admin fees and charges. A single plan could save you money in the long run.
Better investment options. Access to a broader range can help you diversify and potentially increase returns.
Easier to manage. Just one provider to deal with and monitor.
Cons
Loss of benefits. Some plans offer unique benefits, such as guaranteed returns or specific death benefits, which you could lose.
Fees and charges. Some providers charge exit fees or transfer costs. Check the consolidation is cost-effective.
Changes in investment strategy. A new plan with a different strategy could change your risk profile and potential returns.
Tax implications. Large pots can still have tax implications, especially when you take lump sums. Rules have changed in recent years, so check the latest guidance on GOV.UK or speak to a regulated adviser.
In summary: consolidating can simplify your planning, reduce costs and widen your investment options, but weigh that against lost benefits, fees, a different investment strategy and tax. It’s always a good idea to seek professional advice before making any significant financial decision.
Useful links:PensionBee have an extensive FAQ on their pension consolidation service.
💼
Self-employed
When you’re self-employed you don’t get auto-enrolled into a pension scheme like you would if you were employed, so it’s a DIY approach. Is it worth having a pension when self-employed? Here are the options.
1. State Pension
The first bit of good news: exactly as if you were employed, your National Insurance contributions make you eligible for the State Pension. You need at least 10 qualifying years to get any State Pension, and usually 35 qualifying years for the full amount. Drag the slider to see roughly where you’d land. See the National Insurance section for how qualifying years work, and check your National Insurance record to see how many you’ve racked up so far.
010 min35 full
The full new State Pension is currently £241.30 a week (2026/27), but the amount changes each April, so check the latest figure on GOV.UK. Your own record can differ, for example if you were contracted out before 2016, so the result above is a rough guide only.
2. Tax benefit
In my pensions taster video I describe pensions as a “tax efficient long term savings plan”, and that also applies if you pay into a pension when self-employed. If you’re a higher rate tax payer, claim the extra tax benefit through your self-assessment. See how pensions affect your tax for worked examples.
Most you can pay in each tax yearthe lower of
→
Your UK relevant earnings100%
or
Standard annual allowance (2026/27)£60,000
Higher earners, or those who’ve already accessed their pensions, may have a reduced allowance. Check GOV.UK or speak to a professional for your situation.
3. Savings vs pension
The main difference between a savings account and a pension comes down to two things:
Savings
Not as tax efficient as a pension. Though if you save through an ISA, you’re not taxed on your interest at all.
Pension
Ultimately an investment (see Investments), and investment values can go up and down, so it’s riskier.
4. Setting up your own pension
Unlike employed auto-enrolment, you’ll have to set it up yourself (it can’t all be good news…). The options are:
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