Planning for retirement is one of the most important financial steps you can take. While it may seem a long way off, the decisions you make today can significantly shape your financial well-being in later life.
To understand the role of personal pensions, it’s useful to first look at the foundation of retirement income in the UK: the state pension.
The UK state pension
For the 2025/26 tax year, the full new state pension is £230.25 per week, which amounts to £11,973 per year. The actual amount an individual receives depends on their National Insurance record, and typically 35 qualifying years are needed to receive the full amount.
The state pension provides a baseline income designed to cover basic living needs. However, for many people, this amount alone may not be sufficient to maintain their desired standard of living in retirement, which is why additional sources of income, such as workplace and personal pensions, are crucial.
How a personal pension works
A personal pension is a type of defined contribution pension that you arrange yourself. You make contributions that are invested by a pension provider with the aim of building a fund for your retirement.
The money you contribute is invested in a portfolio of assets, which may include shares, bonds, and other investments. By investing your contributions, your money has the potential to grow over time, though this is not guaranteed. The final value of your pension fund primarily depends on:
- The total amount of money you have contributed.
- The investment performance of the funds (which can go down as well as up).
- The level of charges and fees taken by the pension provider, which will reduce the value of your fund.
- How you decide to take your money at retirement.
The benefit of tax relief
When you contribute to a personal pension, you typically benefit from tax relief. This means that some of the money that you would have paid in Income Tax is added to your pension pot instead. For most people, this effectively means a 25% top-up on their contributions. For example, a contribution of £80 from you is topped up to £100 in your pension. Higher and additional rate taxpayers may be able to claim further tax relief.
This tax relief is a significant benefit of pension saving. It’s important to remember that tax rules can change, and their value to you depends on your personal circumstances.
The impact of pausing or stopping your contributions
If you are considering pausing or stopping your pension contributions, it is vital to understand the potential consequences:
- A smaller retirement fund: the most direct impact is that you will have less money saved for retirement.
- Loss of employer contributions: if you are in a workplace pension, your employer often matches or contributes to your pension. Stopping your own contributions usually means you will lose your employer’s contribution as well.
- Missed tax relief: you will no longer receive the government top-up on the contributions you have stopped making.
- Reduced compounding: compounding is the effect where any growth your investments make can then generate its own growth. Halting contributions reduces the base on which this compounding can occur, potentially having a significant impact on your final fund value.
Even a short ‘holiday’ from contributions can be difficult to restart, and the longer you leave it, the harder it can be to make up the shortfall later on.
How much should you contribute?
A common industry rule of thumb suggests aiming to save 12-15% of your gross income towards retirement. However, this is a general guideline and not personal financial advice. The right amount for you will depend entirely on your unique circumstances, including your age, income, career prospects, existing debts, and what you want your retirement to look like. Before starting or increasing pension contributions, you should consider your overall financial situation.
See an illustration of your future pension
To help you understand how your contributions could build over time, you can use a pension calculator.
Please be aware that the figures produced are only illustrations, not a guarantee of future returns. They are based on the assumptions you input and do not fully account for the impact of provider charges, inflation, or the fact that investment performance can be better or worse than assumed.
Important Information: This article is not personal financial advice. The value of investments, and any income from them, can go down as well as up and you may get back less than you have invested. Tax treatment depends on your individual circumstances and may be subject to change in the future.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
