Personal pension vs. workplace pension

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Saving for your future or thinking about it? There’s every chance you’ve heard of personal and workplace pension schemes. We explain the differences between them to help you better understand any schemes you might be part of now or in the future.

What’s the difference between a personal pension and a workplace pension?

There are a few differences between personal and workplace pensions.

Firstly, a personal pension plan is something you set up yourself by contacting a pension provider.

Personal pension schemes are usually 'defined contribution’ (also known as ‘money purchase’) schemes. You’ll pay money into the pension plan that’s set up within the scheme, and that money is then invested. The amount you’ll get back depends on how much has been paid in, how your investments have performed, and any charges taken.

To open a personal pension plan, you might need to pay in a lump sum or set up regular payments. Your provider will normally specify the minimum amount.

Going forward, you’ll probably be able to start, stop, and adjust your own payments when you want.

You can usually take your money from the age of 55 (rising to 57 in 2028).

Meanwhile, if you’re employed and meet certain criteria, you’ll normally be automatically enrolled into a workplace pension scheme. Your employer sets up your workplace pension plan within this – not you.

If you don’t want to be part of your workplace pension scheme, you can opt out. You can read more in our pension auto-enrolment article.

Like personal pension schemes, many workplace ones are defined contribution schemes. But here’s a key difference: your employer typically needs to pay into your workplace pension plan. Normally, your employer’s minimum payment is 3% of your ‘qualifying earnings’ – that is, anything you earn in a year between a lower limit of £6,240 and an upper limit of £50,270. But some employers will apply the percentage they pay to all of your earnings, including those above the upper limit.

You usually have to pay in 5% of these earnings. So the minimum total to be paid in is 8%. You can often adjust your own payments if you want.

Some workplace pension schemes are ‘defined benefit’ (or ‘final salary’) schemes, meaning you’ll be paid an income for the rest of your life after a certain age. The amount you’ll get typically depends on your average or final salary when you retire and how long you’ve been part of the scheme. Your employer normally pays into your plan, and you might be able to as well.

With workplace pension schemes, you can usually take your money from age 55 (rising to 57 by 2028). It could be later, especially if you’re in a defined benefit scheme, so check with your employer.

Now for some similarities. When it comes to personal and most defined contribution workplace pension schemes, you can normally choose to take your savings as a flexible income (drawdown) or as lump sums. Or you may be able to buy a guaranteed income for life (an annuity). Not every provider or plan will offer all these options. You can read about ways to take your pension money in our guide.

Another similarity between personal and workplace pension schemes is that you could have tax to pay when you start taking your money. The first 25% of your pension pot is often tax-free, but the rest will be subject to income tax.

Benefits of personal pension schemes

One benefit of personal pension schemes is that they give those who don’t qualify for a workplace pension another way to save for the future. They can be a good option for self-employed people and those who aren’t in paid work, for example.

Personal pension schemes can be beneficial for people who’d like more control over aspects of their pension. You can choose your provider, which isn’t usually the case with workplace pension schemes. And you might have more flexibility when it comes to investment options.

Since the money in your plan is invested, it has the potential to grow in value over time. Remember, the value of investments can go down as well as up and could be worth less than was paid in.

Most personal pension plans come with tax benefits, often in the form of tax relief. Let’s say you pay the current basic rate of income tax, which is 20%. To have £100 paid into your plan, it’d actually only cost you £80. The government would add the extra £20.

It may be possible for a third party – such as a family member – to pay into your personal pension plan. If you’re employed, your employer may pay in if you ask, but they won’t be required to do so.

Benefits of workplace pension schemes

An important benefit of workplace pension schemes is that your employer normally needs to pay into your plan. As we’ve mentioned, there are minimum payments. But some employers are willing to put in more than their 3% minimum. Some might even match your payments up to a certain level – meaning if you put in more money, they will too. This can help you build up your savings.

Some workplace pension schemes also allow third parties to pay in.

For many, the fact that you can be automatically enrolled is a big plus point; you can save for your future without having to spend time and energy opening your pension. Investment choices will normally be made for you, too, although you can often change these if you want.

Workplace pension plans usually come with tax benefits, which can work in the way we’ve already described. But it’s possible your tax benefits could work in a different way – for example, if you’re part of a salary sacrifice or salary exchange scheme. The bottom line is the same, though: you can get a financial boost from the government.

And again, your money is invested, so there’s potential for your pension pot to grow.

Can I have a personal pension and a workplace pension?

You can have a personal and a workplace pension at the same time. For example, you might set up a personal pension plan, then later join the workforce and be enrolled into a workplace pension scheme.

You can have as many pensions as you like. But do keep tax in mind. For example, you’ll need to think about your Pension Annual Allowance. This is the total amount you, your employer and others can pay in across all your pension plans in a tax year while still getting tax benefits on payments. If you go over this amount, there could be a tax charge.

You’ll need to consider the Pension Lifetime Allowance. This is the total amount you can build up in pension savings over your lifetime before a tax charge will apply.

You might end up with pension savings spread across multiple plans – especially if you move jobs several times. Some people find their money easier to manage if it’s all in one place, and it’s often possible to transfer your pension savings into a single plan. Transferring isn’t right for everyone, though, so check with a financial adviser if you’re not sure. For more information about pension transfers, visit our pension transfer guide.

Should I have a workplace pension or a personal pension?

You might be wondering if you should have a workplace pension or a personal pension. Essentially, it all comes down to a mix of choice and circumstances.

To recap, not everyone is eligible to join a workplace pension scheme. So personal pension schemes can be especially helpful for people who are self-employed or not in employment. And they may be a good choice if you want more control over things like your investment options.

If you’re in employment, it’s likely you’ve been automatically enrolled into a workplace pension scheme. You could still ask to be part of one even if you don’t qualify for auto-enrolment. For example, if you earn less than £6,240 a year, your employer typically needs to give you access to a pension scheme if you ask – but they don’t need to pay into your plan. If you earn between £6,240 and £10,000 a year, you can ask to join a workplace pension scheme, and your employer normally pays into your plan.

It’s important to do some research and consider what’s best for you. The more you know, the more confident you could feel when making decisions about saving. 

If you’re feeling unsure about pension matters, it could be worth seeking financial advice. If you don’t have a financial adviser, you could find one at Unbiased.co.uk.

The information here is based on our understanding in January 2023 and shouldn’t be taken as financial advice.

A pension is an investment and its value can go down as well as up and could be worth less than was paid in.

Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.

Standard Life accepts no responsibility for information in external websites. These are provided for general information.