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Pensions

Pension types explained (UK)

Liam Kane · WealthR 9 min read

Pensions have a branding problem: the word covers about six completely different things, they all sound alike, and the language around them seems designed to keep normal people out. Here's the plain-English version — what each UK pension type is, how the tax works, and the bit everyone trips on: when you can actually touch the money.

I nodded along to all of this for years without really knowing what I actually had. DC, DB, SIPP, PCLS, annual allowance — it's a wall of initials, and most explanations start halfway up it. So let's start at the bottom.

Where are you at with pensions?
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The one idea that makes pensions click

Strip away the names, and a pension is a tax deal. You put money in and the government adds tax relief on top. It grows with no tax on the way. You can't touch it until a set age (currently 55, rising to 57 from April 2028). And when you do take it, the first 25% is tax-free and the rest is taxed as income.

That's the trade at the heart of every pension: a tax boost and tax-free growth now, in exchange for locking the money away and paying some income tax on the way out. Everything below is a variation on that one deal.

The tax relief, in real numbers

What £100 in your pension costs youA £100 pension contribution costs a basic-rate taxpayer £80, a higher-rate taxpayer £60, and an additional-rate taxpayer £55 — the rest is tax relief.£100 IN YOUR PENSION COSTS YOU£100BASIC 20%£80+£20HIGHER 40%£60+£40ADD'L 45%£55+£45grey = what you pay · green = relief added
Higher earners get more back: the same £100 in the pension costs less the higher your tax rate.

Relief comes at your income tax rate — so a £100 contribution effectively costs:

  • £80 for a basic-rate (20%) taxpayer
  • £60 for a higher-rate (40%) taxpayer
  • £55 for an additional-rate (45%) taxpayer

Basic-rate relief is usually added automatically; higher and additional-rate taxpayers claim the extra through Self Assessment. There's a ceiling — the annual allowance — of £60,000 a year for most people (less for very high earners; more below).

Go deeper: the annual allowance rules that catch people out Advanced

The £60,000 headline hides three rules that trip up higher earners and anyone already drawing a pension:

  • The taper. Once your adjusted income tops £260,000 (and threshold income tops £200,000), the allowance drops by £1 for every £2 over — down to a floor of £10,000 (MoneyHelper).
  • Carry forward. If you didn't use your full allowance in the last three tax years, you can often carry the unused part forward and pay in more than £60,000 this year — provided you were a pension scheme member for those years. The carry forward guide works through it.
  • The MPAA. The moment you flexibly take taxable cash from a DC pension, your annual allowance for future DC contributions collapses to £10,000 — permanently. A genuine trap if you dip into a pension early and carry on working.

For higher earners, salary sacrifice is usually the first lever to pull before any of this starts to bite.

The UK pension types, one by one

🏢 Workplace pension (defined contribution, "DC")

The most common private pension in the UK. Your employer takes contributions from your pay and adds their own; the money is invested in your name and grows or falls with markets — you carry the investment risk, and the final pot depends on how those investments do. Under auto-enrolment the minimum is 8% of qualifying earnings — at least 3% from your employer and 5% from you. The employer's share is the headline: it's money you only receive by paying in enough to trigger the match.

Optimiser move Paying in through salary sacrifice, if your employer offers it, takes the contribution before National Insurance — so you (and often your employer) save NI on top of the income tax relief. That's a bigger boost than contributing from your take-home pay. The free salary sacrifice calculator shows the difference on your numbers.

📈 SIPP (Self-Invested Personal Pension)

A DC pension you run yourself. Same tax deal, but instead of your employer's default fund you choose the investments — funds, shares, ETFs and more. Popular with the self-employed (who have no workplace scheme) and anyone who wants more control. A SIPP and a workplace DC pension are the same species — a pot of your money invested for retirement — just with different amounts of DIY. If you're weighing a SIPP against an ISA, our ISA vs SIPP guide walks through the trade-off.

🏛️ Defined benefit ("DB" — final salary or career average)

Defined contribution versus defined benefitA defined contribution pension is a pot you build whose value varies and you carry the risk. A defined benefit pension is a guaranteed income for life where the employer carries the risk.DEFINED CONTRIBUTION (DC)you carry the riskA pot you build — value variesWorkplace · SIPP · PersonalDEFINED BENEFIT (DB)employer carries itA guaranteed income for lifeFinal salary / career average
The core split: DC builds a pot whose value moves with markets; DB promises a set income, with the risk on the employer.

A completely different animal. A DB pension doesn't hand you a pot; it promises a guaranteed income for life, based on your salary and years of service. Your employer carries all the investment risk. It's common in the NHS, teaching, the civil service, the armed forces and older private schemes — and it's often called the gold standard, because that guaranteed, usually inflation-linked income is extraordinarily valuable and very hard to replicate.

Read this bit slowly. Because DB benefits are so valuable, transferring out of one is a big and usually irreversible decision — and for transfers worth £30,000 or more, UK rules require you to take regulated financial advice first. Treat a DB pension as the prize it is, and get proper advice before doing anything that affects it.

👤 Personal pension

A simpler cousin of the SIPP: a personal DC pension where a provider runs a ready-made investment choice for you, rather than you picking everything yourself. Same tax treatment, less DIY. A reasonable middle ground if you want a private pension without managing it.

🏠 Lifetime ISA (LISA)

Not technically a pension — but it's used as one, so it earns its place here. You get a 25% government bonus on up to £4,000 a year (up to £1,000 free annually). It can be used for a first home, or for retirement from age 60. The catch: withdraw it early for anything other than a first home or age 60 and you pay a penalty that claws back the bonus and a little more. So the "first home versus retirement" distinction really matters with a LISA.

🇬🇧 The State Pension

The foundation the rest sits on. The full new State Pension for 2026/27 is £241.30 a week — about £12,548 a year — from State Pension age, which is 67 for most people now (it's rising from 66 to 67 between April 2026 and April 2028). You generally need 35 qualifying National Insurance years for the full amount, and at least 10 to get anything (gov.uk). Modest on its own, but as a base it meaningfully reduces what your other pensions have to cover.

The rules that shape almost all of them

  • Access age. Currently 55, rising to 57 from 6 April 2028. You can't draw a DC pension or SIPP before then without a penalty.
  • The 25% tax-free part. Up to 25% can be taken tax-free (the Pension Commencement Lump Sum); the rest is taxed as income.
  • The annual allowance. £60,000 a year for most people. Very high earners (adjusted income over £260,000) have it tapered down — potentially to as little as £10,000.
  • The employer match. On a workplace pension, the employer's contribution only lands if you pay in enough to trigger it — which is why people tend to look at the match before anything else.
Go deeper: the cap on tax-free cash Advanced

The “25% tax-free” isn't unlimited. Since the lifetime allowance was abolished, tax-free lump sums are capped by the Lump Sum Allowance of £268,275 across all your pensions combined (2026/27). For most people that's far more than they'll ever reach — but for larger pots it's the ceiling that matters, and some older pensions carry protected higher amounts worth checking before you touch anything.

So which is which, in a line each

  • Workplace DC — your default pension, with free employer money attached.
  • SIPP — the same idea, but you pick the investments (and the usual route for the self-employed).
  • Defined benefit — a guaranteed income for life. Rare, valuable, don't touch without advice.
  • Personal pension — a managed private pension, less hands-on than a SIPP.
  • LISA — a 25% top-up for a first home or retirement from 60.
  • State Pension — the flat-rate foundation from 67.

Which combination fits depends on your job, your tax rate, your timeline and whether you have a DB scheme — and for anything major, it's worth talking it through with a qualified adviser.

A few common questions

What's the difference between a defined contribution and a defined benefit pension?
A DC pension (workplace or SIPP) builds a pot of invested money — you carry the investment risk and the final value varies. A DB pension pays a guaranteed income for life based on your salary and service, with the employer carrying the risk.
What is a SIPP?
A Self-Invested Personal Pension — a DC pension you manage yourself, choosing the investments. Same tax relief and access rules as a workplace DC pension; popular with the self-employed and hands-on investors.
How much tax relief do I get on pension contributions?
Relief comes at your income tax rate: a £100 contribution costs a basic-rate taxpayer £80, a higher-rate taxpayer £60, and an additional-rate taxpayer £55. Basic-rate relief is added automatically; higher rates are claimed via Self Assessment.
When can I access my pension?
For DC pensions and SIPPs, currently age 55, rising to 57 from 6 April 2028. A DB scheme pays from its own normal pension age, and the State Pension from State Pension age (67 for most people now).
Is the State Pension enough to retire on?
On its own, no — the full new State Pension is about £12,548 a year for 2026/27. It's best treated as a foundation that reduces what your other pensions and savings need to provide.
Should I transfer my defined benefit pension?
This is a regulated, high-stakes decision, and for transfers of £30,000 or more you're legally required to take regulated advice first. DB benefits are extremely valuable — this is one for you and a qualified adviser, not a decision to make on a guide.

See all your pensions in one place

The hard part of pensions is that they're scattered — an old workplace pot here, a SIPP there, a DB scheme you half-forgot, the State Pension somewhere in the future. WealthR pulls workplace DC pensions, SIPPs, defined benefit schemes, LISAs and the State Pension into one retirement picture, so you can see what they'll actually pay and when. Free to try, no bank linking — and Pro adds a household pension-efficiency optimiser (which partner should make the next contribution) and the Tax Year Optimiser.

See your retirement picture free →

If you're weighing where the next contribution should go, the free Salary Sacrifice Pension Calculator shows the real tax saving, the FIRE Number Calculator models when it all adds up to enough, and Coast FIRE explains the milestone where you can stop adding to it.

⚖️ Not financial advice: This is information, not a recommendation. WealthR isn't authorised by the Financial Conduct Authority. Pensions — and especially defined benefit transfers — are exactly where a qualified, FCA-authorised adviser earns their keep.

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