The three types of UK pension
In brief: Your UK pension is likely a mix of State Pension, workplace, and personal (SIPP). Each type has different rules when you take money out — understanding how each type works gives you the inputs needed to configure your projection.
Most people in the UK have some combination of three pension types.
State Pension
The State Pension pays up to £11,973 per year (2025/26). You qualify based on your National Insurance record — 35 qualifying years for the full amount, at least 10 to receive anything. It starts at your State Pension age, currently 66 and rising to 67 by 2028.
The State Pension is taxable income, but it's paid without tax deducted. It uses up part of your Personal Allowance, which means your other income sources may be taxed sooner.
Workplace pensions (defined contribution)
If you're employed, your employer must enrol you in a workplace pension. Both you and your employer contribute, and the money is invested in funds you may be able to choose. The value of your pot depends on how much goes in and how the investments perform — there is no guaranteed amount at retirement.
Personal pensions and SIPPs
A Self-Invested Personal Pension (SIPP) is a pension you set up yourself. It works like a workplace pension — contributions receive tax relief, and the money is invested — but you have full control over which funds you invest in. SIPPs are common among self-employed people and those who want more investment choice.
Pension tax relief
When you contribute to a pension, the government adds tax relief. For every £80 a basic rate taxpayer contributes, £100 goes into the pension. Higher rate taxpayers can claim an additional 20% through their tax return.
There is an annual limit on how much you can contribute and receive tax relief — currently £60,000 per year (or your total earnings, whichever is lower).
Defined benefit pensions
Some employers offer defined benefit (DB) pensions, also called final salary or career average pensions. These provide a specific income in retirement based on your salary and years of service, rather than an investment pot. For example, a scheme offering 1/60th accrual means 30 years of service gives you 30/60 = 50% of your final salary as annual pension income.
DB income is taxable as employment income. Most DB schemes include inflation linking, meaning payments increase annually with CPI or RPI. DB pensions are increasingly rare in the private sector but still common in the public sector.
Taking money from your pension
From age 55 (rising to 57 from April 2028), you can start taking money from defined contribution pensions. There are three main routes — flexi-access drawdown, UFPLS (uncrystallised funds pension lump sum), and buying an annuity — each with different tax treatment and flexibility.
The next article explains how each one works: Accessing Your DC Pension.
These projections are for modelling purposes only. They do not constitute financial advice. Tax rules are subject to change. Please consult a qualified financial adviser before making financial decisions.