A personal pension is a pension scheme set up by an individual rather than an employer. You choose the provider, make contributions, and select how your money is invested. A Self-Invested Personal Pension (SIPP) is a type of personal pension that gives you greater control over investment choices, including the ability to hold individual shares, commercial property, and a wider range of funds.
Personal pensions sit alongside workplace pensions as one of the two main routes to building retirement income in the UK.
How Personal Pensions Work
Contributions and Tax Relief
When you contribute to a personal pension, you receive tax relief from HMRC, which effectively boosts your contributions:
| Tax band | Contribution | Tax relief | Total in pension |
|---|---|---|---|
| Basic rate (20%) | £800 | £200 | £1,000 |
| Higher rate (40%) | £600 | £400 | £1,000 |
| Additional rate (45%) | £550 | £450 | £1,000 |
For basic-rate taxpayers, the provider claims the 20% relief directly from HMRC (known as relief at source). Higher and additional-rate taxpayers claim the extra relief through their self-assessment tax return.
Annual Allowance
The total amount of tax-relieved pension contributions you can make across all schemes in a tax year is limited by the annual allowance, and your own contributions only get relief up to 100% of your relevant earnings:
| Allowance | How it works |
|---|---|
| Standard annual allowance | A fixed limit that applies to most savers |
| Tapered annual allowance | For very high earners, the allowance is reduced gradually once adjusted income passes a set level, down to a minimum |
| Money purchase annual allowance | A much lower limit that applies once you have flexibly accessed pension benefits |
The government sets these limits in legislation and changes them from time to time, so check the current pension allowances on GOV.UK before making a large contribution.
You can contribute more than the annual allowance, but the excess will be subject to an annual allowance charge at your marginal income tax rate.
Carry Forward
If you have not used your full annual allowance in the previous three tax years, you can carry forward the unused amount and make a larger contribution in the current year. This is particularly useful for directors who want to make a substantial one-off pension contribution.
SIPPs vs Standard Personal Pensions
| Feature | Standard Personal Pension | SIPP |
|---|---|---|
| Investment choice | Limited range of managed funds | Full range: funds, shares, bonds, ETFs, commercial property, cash |
| Control | Provider selects and manages funds | You (or your adviser) select investments |
| Fees | Typically lower (AMC 0.3-0.75%) | Platform fee + dealing charges (can be higher overall) |
| Minimum contribution | Often from £25/month | Varies (some from £0) |
| Suitability | Hands-off investors | Experienced investors or those with an adviser |
| Commercial property | No | Yes (SIPP can buy commercial property used by your business) |
Commercial Property in a SIPP
A SIPP can purchase commercial property (offices, workshops, warehouses, retail units) and lease it to tenants — including your own business. The rental income is paid into the SIPP tax-free, and the property can grow in value within the pension wrapper.
This is a popular strategy for company directors who own their business premises. Instead of the business owning the property, the director’s SIPP buys it and the business pays a market rent to the SIPP.
Personal Pensions for Company Directors
Company directors have several options for making pension contributions, and personal pensions offer distinct advantages.
Employer Contributions to a Personal Pension
A company can make employer contributions directly into a director’s personal pension or SIPP. These contributions are:
- An allowable business expense for Corporation Tax purposes
- Not subject to National Insurance (unlike salary)
- Not treated as a benefit in kind (provided they are within the annual allowance)
This can make employer pension contributions a tax-efficient way to fund retirement from company resources. Salary, dividends and pension contributions cannot be compared by applying one flat rate: salary depends on annual PAYE thresholds, dividends come from post-Corporation-Tax profits, and pension tax relief depends on the annual-allowance and wholly-and-exclusively rules. Pension money also cannot normally be accessed until the minimum pension age.
Personal Contributions by Directors
Directors who are also employees can make personal pension contributions via salary sacrifice through the workplace scheme, or directly into their personal pension. Personal contributions receive tax relief as described above.
Accessing Your Pension
You can access your personal pension from age 55 (rising to 57 from 6 April 2028). The options are:
Tax-Free Lump Sum
You can take up to 25% of your pension pot as a tax-free lump sum (subject to the lump sum allowance, a lifetime cap on tax-free cash set in legislation). The remainder is subject to income tax when withdrawn.
Flexi-Access Drawdown
You move your pension pot into drawdown and take income as and when you need it. Each withdrawal (after the 25% tax-free element) is taxed as income at your marginal rate.
Annuity
You use some or all of your pension pot to buy a guaranteed income for life from an insurance company. Annuity rates depend on your age, health, and market conditions at the time of purchase.
Uncrystallised Funds Pension Lump Sum (UFPLS)
You take lump sums directly from your pension pot. Each withdrawal is 25% tax-free and 75% taxable.
Important: Money Purchase Annual Allowance
Once you flexibly access taxable income from a defined contribution pension (via drawdown or UFPLS), your annual allowance for future defined contribution savings drops to the much lower money purchase annual allowance. This is a critical consideration for directors still making contributions.
Choosing a SIPP Provider
When selecting a SIPP, consider:
| Factor | What to check |
|---|---|
| Platform fee | Annual charge for holding the SIPP (fixed fee or percentage) |
| Dealing charges | Cost per trade if investing in individual shares or ETFs |
| Fund range | Number and quality of available funds |
| Drawdown charges | Fees for setting up and managing drawdown |
| Commercial property | Whether the provider supports property purchase |
| Transfer process | Ease of transferring in existing pensions |
| Customer service | Quality of support and online tools |
Major UK SIPP providers include Hargreaves Lansdown, AJ Bell, Interactive Investor, Fidelity, and Vanguard. Fees vary significantly, so compare total costs based on your expected pot size and investment activity.
Personal Pension vs Workplace Pension
A personal pension and a workplace pension can be held simultaneously. For employees, the workplace pension typically offers employer contributions that a personal pension does not. For self-employed individuals and company directors extracting profits through dividends, a personal pension or SIPP may be the primary retirement savings vehicle.
The combined contributions to all pensions must remain within the annual allowance to avoid a tax charge.
Common Mistakes
- Exceeding the annual allowance without checking carry-forward availability
- Triggering the money purchase annual allowance by accessing pension benefits too early
- Not claiming higher-rate tax relief — The extra relief for 40% and 45% taxpayers must be claimed via self-assessment
- Paying personal contributions when employer contributions would be more tax-efficient — Employer contributions avoid NIC entirely
- Choosing a SIPP when a simple personal pension would suffice — Higher SIPP fees can erode returns for passive investors with small pots