When people hear the word pension, they often think one of two things:

• “Something I’ll worry about later”

• “Something complicated that probably involves a spreadsheet and regret”

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In reality, a pension is one of the most powerful (and tax-efficient) tools available in the UK for building long-term financial security — whether you’re employed, self-employed, or running your own company.

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So… what is a pension?

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A pension is a long-term savings arrangement designed to provide you with an income when you stop working (usually from age 55, rising to 57 from 2028).

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You put money into a pension during your working life. That money is then invested — typically in a mix of shares, bonds, and other assets — and grows over time. When you reach pension age, you can start drawing money from it.

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The big difference between a pension and normal savings? Tax advantages. And lots of them.

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How pensions work in the UK

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When you pay into a pension:

• You get tax relief on contributions

• Your investments grow largely tax-free

• You can usually take 25% tax-free when you access it

• The rest is taxed as income when you draw it

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In short: The government helps fund your future — as long as you lock the money away for retirement.

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The main types of pensions in the UK

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1. Workplace pensions

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If you’re employed, your employer must automatically enrol you into a workplace pension (auto-enrolment), provided you meet certain criteria.

• You contribute a percentage of your salary

• Your employer must contribute too

• The government adds tax relief

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This is essentially free money on top of your pay — opting out is usually a bad idea unless cashflow is genuinely tight.

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2. Personal pensions (including SIPPs)

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If you’re self-employed, a contractor or want more control, you’ll likely use a personal pension, such as a SIPP (Self-Invested Personal Pension).

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These allow you to:

• Choose how much you contribute

• Decide how your money is invested

• Top up irregularly or regularly

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Very popular with freelancers, directors, and higher earners.

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3. Company pensions (for directors)

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If you run a limited company, pension contributions can be made directly by the company.

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Why this matters:

• Contributions are usually allowable business expenses

• No employer or employee National Insurance

• Extremely tax-efficient profit extraction

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For many directors, pensions beat dividends hands down once structured properly.

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How much can you put into a pension?

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For most people:

• Annual allowance: £60,000 per tax year (subject to earnings)

• Contributions above this may trigger tax charges

• Unused allowances can sometimes be carried forward

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There are also lifetime limits to be aware of, although these rules have changed significantly in recent years and need careful planning. (Translation: don’t guess — get advice.)

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When can you access your pension?

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• Currently from age 55

• Rising to 57 from April 2028

• Earlier access is usually heavily penalised

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When you do access it, you can usually:

• Take 25% tax-free

• Draw the rest flexibly or as income

• Leave funds invested if you don’t need them yet

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A pension isn’t “all or nothing” — modern pensions are far more flexible than people realise.

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Is a pension worth it?

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For most people in the UK: yes — absolutely.

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A pension is:

• One of the most tax-efficient savings vehicles available

• Flexible at retirement

• Protected from creditors in many cases

• A key part of long-term financial planning

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The real risk isn’t putting too much into a pension — it’s leaving it too late or never starting at all.

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Final thought

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A pension isn’t just a retirement product. It’s a tax planning tool, a wealth-building strategy, and a way of future-proofing your lifestyle. The key is understanding which pension, how much, and how it fits into your wider tax position — especially if you’re self-employed or running a company.

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That’s where good planning (and good accountants) come in. Contact us for more information!

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