What is a pension?

Here you’ll find a quick guide to the different types of pension and the benefits of saving for retirement.

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A pension is a way of saving for your retirement. They’re a tax-efficient way for you to save because unlike other types of savings plans, they benefit from tax relief.

This means that, if you're a basic rate taxpayer, for every 80 pence you put into a pension, the government will top it up to £1. Any tax savings you receive will depend on your individual circumstances and may change in the future. If you pay tax at higher rates you may be able to claim more tax relief.

Your pension savings are invested to help them grow

With a pension you can choose to save regularly and you can choose to make single contributions into your plan at any time.

There are lots of funds you can choose to invest your pension savings. Higher risk investments can help your money grow more. But there’s also a greater chance of losing money. With lower risk investments, your money may not grow as much as you want it to.

You can choose what's right for you and you can change your investments to suit your circumstances.

We have a range of innovative investment options specifically for pensions.

Remember that investment returns are never guaranteed. So while your savings could grow, their value can also go down. This means you could get back less than you put into your plan.

What types of pension are there?

There are three main kinds of pension - personal pensions, workplace pensions,  and the state pension.

Personal pensions

A personal pension is one that you set up yourself. The money you save into a personal pension is invested to help it grow. So while your savings could grow, their value can also go down. This means you could get back less than you put into your plan.

You also benefit from tax relief on the money you save. Of course, tax relief depends on your individual circumstances and may change.

Your employer won’t usually save into a personal pension, although they can if they want to.

How much pension income you receive will depend on payments made into your pension, the investment performance and any charges deducted from your plan. 

Take your pension savings in a way that suits you

You can normally start taking your pension savings any time after age 55 – even if you’re still working. This will increase to age 57 from 6 April 2028. You can choose to -

  1. Take it as cash – with each retirement option, you can normally take up to 25% of your pension savings tax free. The other 75% is taxable. You can take some or all of your plan as a cash lump sum.
  2. Enjoy flexible access to your savings – take the income you need, when you need it.
  3. Buy a secure income – enjoy a guaranteed regular income for the rest of your life.

Your pension savings will remain invested until you decide to access them. You can start taking your pension savings from age 55. This will increase to age 57 from 6 April 2028.

Workplace pension

A workplace pension is set up by your employer. Depending on your age and salary, you’ll be enrolled into your employer’s workplace pension automatically. You don’t need to do anything. What’s more, if you choose to pay into your pension, your employer will too.

Types of workplace pension

Workplace pensions fall under two categories – defined contribution and defined benefit. 

  • defined contribution pension plan is a type of pension where you and your employer, save for your future. The money you put into a defined contribution pension is invested to help it grow.

    Of course, this isn’t guaranteed, so if your investments perform poorly, you could get back less than what you started with.
  • defined benefit pension plan is a type of pension where your employer promises to pay you a set amount of income when you retire. This is also referred to as a ‘final salary scheme’. The income you get when you retire depends on how long you’ve been a member of the scheme and how much you’re earning when you stop working.

State pension

The state pension is provided by the government. Currently, you’ll receive a state pension when you reach state pension age.

How much state pension you get depends on how much National Insurance contributions you’ve paid while you’ve been working.

State retirement income comes in two main forms:

  • The new State pension
    This provides a flat rate payment to people who have met the minimum National Insurance Contribution requirements. In the current tax year (2022/23), the new State pension is £185.15 a week for a single person. This applies to a man born after 6 April 1951 or a woman born after 6 April 1953.
  • State Second Pension
    The State Second Pension (S2P) is an earnings-related pension that replaced the former State Earnings Related Pension Scheme (SERPS) in April 2002. It's designed to top up the Basic State Pension and it’s based on earnings - providing the most benefit to people on low incomes.

You can check your state pension, find out your state pension age and loads more on the GOV.UK website.

Personal pensions

A personal pension is one that you set up yourself. The money you save into a personal pension is invested to help it grow. So while your savings could grow, their value can also go down. This means you could get back less than you put into your plan.

You also benefit from tax relief on the money you save. Of course, tax relief depends on your individual circumstances and may change.

Your employer won’t usually save into a personal pension, although they can if they want to.

How much pension income you receive will depend on payments made into your pension, the investment performance and any charges deducted from your plan. 

Take your pension savings in a way that suits you

You can normally start taking your pension savings any time after age 55 – even if you’re still working. This will increase to age 57 from 6 April 2028. You can choose to -

  1. Take it as cash – with each retirement option, you can normally take up to 25% of your pension savings tax free. The other 75% is taxable. You can take some or all of your plan as a cash lump sum.
  2. Enjoy flexible access to your savings – take the income you need, when you need it.
  3. Buy a secure income – enjoy a guaranteed regular income for the rest of your life.

Your pension savings will remain invested until you decide to access them. You can start taking your pension savings from age 55. This will increase to age 57 from 6 April 2028.

Workplace pension

A workplace pension is set up by your employer. Depending on your age and salary, you’ll be enrolled into your employer’s workplace pension automatically. You don’t need to do anything. What’s more, if you choose to pay into your pension, your employer will too.

Types of workplace pension

Workplace pensions fall under two categories – defined contribution and defined benefit. 

  • defined contribution pension plan is a type of pension where you and your employer, save for your future. The money you put into a defined contribution pension is invested to help it grow.

    Of course, this isn’t guaranteed, so if your investments perform poorly, you could get back less than what you started with.
  • defined benefit pension plan is a type of pension where your employer promises to pay you a set amount of income when you retire. This is also referred to as a ‘final salary scheme’. The income you get when you retire depends on how long you’ve been a member of the scheme and how much you’re earning when you stop working.

State pension

The state pension is provided by the government. Currently, you’ll receive a state pension when you reach state pension age.

How much state pension you get depends on how much National Insurance contributions you’ve paid while you’ve been working.

State retirement income comes in two main forms:

  • The new State pension
    This provides a flat rate payment to people who have met the minimum National Insurance Contribution requirements. In the current tax year (2022/23), the new State pension is £185.15 a week for a single person. This applies to a man born after 6 April 1951 or a woman born after 6 April 1953.
  • State Second Pension
    The State Second Pension (S2P) is an earnings-related pension that replaced the former State Earnings Related Pension Scheme (SERPS) in April 2002. It's designed to top up the Basic State Pension and it’s based on earnings - providing the most benefit to people on low incomes.

You can check your state pension, find out your state pension age and loads more on the GOV.UK website.

Deciding how much to save

You can choose to save as much as you can afford. If you want to, you could save up to 100% of your UK earnings into your pension each tax year.

There's an upper limit on the amount that you can save into pensions and receive tax relief each year. This is known as the annual allowance

Secret Life of Pensions

What does your pension get up to after it leaves your pay packet?

It doesn’t just sit in an account somewhere until you retire. It's busy working hard in the real world so that when you’re older, hopefully you won’t have to.

Find tailored advice that's right for you

We recommend talking about the different types of pension available with a professional financial adviser. They can give you personalised advice and recommendations to match your individual needs and circumstances.

If you don't already have an adviser, there are a number of directories that you can use to search for one in your area and according to their specialisms.