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 for every 80 pence you put into a pension, the government will turn it into £1. Tax relief depends on your individual circumstances and may change. So you could get more or less than this, depending on how much tax you pay.

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Your pension savings are invested to help them grow

There are lots of ways for you to invest your pension savings. They're all about balancing the reward you want to get with the risk you're prepared to take.

You can choose what's right for you. and you can change your investments to suit your circumstances, like if they change in the future.

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

Investments can go down as well as up and you might not get back what you put in.

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. Of course, this isn’t guaranteed, so if your investments perform poorly, you could get back less than you paid in.

You also benefit from tax relief on the money you save and your savings build up largely tax free. 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.

When you reach age 55, you’ll have three main ways to enjoy the money you’ve saved. How much pension income you eventually get will depend on:

  • how much pension savings you've built up
  • how well your investments perform
  • any charges that may apply
  • how you choose to enjoy your pension savings.

Take your pension savings in a way that suits you

When you reach age 55, you'll be able to access your pension savings – even if you’re still working. So whenever the time feels right for you, you'll find three main ways to enjoy the money you’ve saved:

  1. Take it as cash – have all or some of your pension savings paid as a cash lump sum (the first 25% is tax-free, with the remainder subject to income tax when taken).
  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 do so from age 55, but there's  no rush, you can decide when the time is right for you.

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, when you save for your future, 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. When you reach age 55, you’ll have three main ways to enjoy the money you’ve saved.
  • 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 worked for your employer 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 (2020/21), the new State pension is £175.20 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. Of course, this isn’t guaranteed, so if your investments perform poorly, you could get back less than you paid in.

You also benefit from tax relief on the money you save and your savings build up largely tax free. 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.

When you reach age 55, you’ll have three main ways to enjoy the money you’ve saved. How much pension income you eventually get will depend on:

  • how much pension savings you've built up
  • how well your investments perform
  • any charges that may apply
  • how you choose to enjoy your pension savings.

Take your pension savings in a way that suits you

When you reach age 55, you'll be able to access your pension savings – even if you’re still working. So whenever the time feels right for you, you'll find three main ways to enjoy the money you’ve saved:

  1. Take it as cash – have all or some of your pension savings paid as a cash lump sum (the first 25% is tax-free, with the remainder subject to income tax when taken).
  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 do so from age 55, but there's  no rush, you can decide when the time is right for you.

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, when you save for your future, 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. When you reach age 55, you’ll have three main ways to enjoy the money you’ve saved.
  • 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 worked for your employer 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 (2020/21), the new State pension is £175.20 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.

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Deciding how much to save

Generally speaking, the more you save, the more you can expect to get back. Although, the value of your pension savings can go down as well as up - so you might get back less than what you put in.

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. If you go over this amount, a 40% tax charge will apply.

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.