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Find out your options when saving for your retirement and compare pension providers.

Your retirement might seem as though it's a long way off, but it's never too soon to start saving for it. It may not be the most exciting task, but it's vital to make sure you'll have enough to tide you over when you decide to retire. In this guide, we've outlined some of the key details about pensions and the different types that exist – some of which you may already have. There are some great tax benefits to paying into a pension, which means that as long as you're happy for your money to be tied up until you retire, it's one of the most efficient ways to save.
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Interactive Investor SIPP
Get £200 cashback when you open a SIPP. Offer ends 30 April. Capital at risk. T&Cs apply. Min £15k investment. New customers only.

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Nutmeg Pension

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Hargreaves Lansdown SIPP
Hargreaves Lansdown is the UK's biggest wealth manager. It's got three different retirement options. Capital at risk.

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Wealthify Pension
10 Portfolios

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Penfold SIPP
4 Portfolios
Bonus of up to £1000 for your pension when tranferring to Penfold

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Moneyfarm SIPP
Moneyfarm has pensions that are matched against your risk appetite, goals and planned retirement date. Capital at risk.

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AJ Bell has two different pension options, a self managed pension and one that is managed for you. Capital at risk.

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PensionBee Pension
Pension Bee is a newbie in the pension market. It helps consolidate your pension plans into one place. Capital at risk.

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Profile Pensions

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Saxo Markets SIPP
Saxo Markets gives flexibility and control over your investment strategy. Capital at risk.

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What is a pension?

A pension is a long-term savings account for your retirement. You pay money into a pension scheme, it’s invested (and, in theory, grows in value), and you reap the rewards when you retire. You can get tax relief on the money you pay into your pension, making it a really tax-efficient way to save.

Once you retire, you can access the money in your pension pot. The age at which you can start receiving payments depends on the type of pension you have, as does how you can access the money.

Pensions have a number of important advantages over other retirement savings options:

  • Tax relief on money you pay into workplace or personal pensions
  • Top-ups from employers if you have a workplace pension
  • The ability to receive a tax-free lump sum when you turn 55. This age is due to rise to 57 by 2028.

There are a few different ways to build up your pension:

  • Via the state pension. This is the pension you receive from the government at your official retirement age in exchange for making sufficient National Insurance contributions.
  • Via a workplace pension. This is a pension set up by your workplace, which your employer usually also pays into.
  • By setting up a personal pension (sometimes called a “private pension”). This is a pension arranged directly by you. You can also consolidate old workplace pensions into a single personal pension.

We work through these in more detail below.

What are the different ways to pay into a pension?

The state pension

The state pension is the regular pension income you’ll receive from the UK government when you reach official retirement age. You can find your state pension age on the website.

As of the 2021-22 tax year, the maximum amount that retirees can expect to receive under the new state pension is £179.60 a week (the amount that those who retired before April 2016 receive is different). The amount is increased each year by the highest of 1 of 3 measures: inflation (as measured by the Consumer Price Index), average earnings increases or 2%. You can find out how much state pension you can expect to receive by checking on the government website.

To be eligible for the full new state pension, you need to have at least 35 qualifying years on your National Insurance (NI) record. This means that for 35 years (not necessarily in a row) at least one of the following applied to you:

  • You were working and paid National Insurance
  • You were in receipt of National Insurance credits
  • You were making voluntary National Insurance contributions.

If, by the time you retire, you have less than 10 qualifying years on your NI record, you won’t receive any state pension. Between 10 and 35 qualifying years means you’ll get some state pension, but not the full amount.

Anyone working in the UK who is over 16 and earning more than a certain amount (as explained on the government-backed MoneyHelper website) is required to make National Insurance contributions. If you don’t think that you’ll make enough contributions to qualify for the state pension, you can usually make voluntary “catch-up” payments to get back on track.

Workplace pensions

Most of us have our first direct encounter with pensions at work, and a company pension scheme can be one of the simplest ways to put money away for retirement. As of April 2017, by law, employers are required to offer company pension schemes that both you and they pay into each month. You’ll be automatically enrolled into a company’s scheme unless you choose to opt out.

The biggest benefit to a workplace pension is that your employer almost always has to pay into it as well (unless you joined the scheme voluntarily, rather than being automatically enrolled, and your monthly income is very low).

Your contributions are taken straight out of your pay before it even hits your bank account, so it’s easy not to miss it, and you don’t pay tax on the money that goes into your pension pot (known as tax relief).

There are 2 different types of workplace pension.

Defined benefit (DB)

These pay out a fixed, regular income when you retire, based on a percentage of your salary during your time at the company. The percentage is calculated based on the years you’ve worked at a company. Defined benefit schemes are becoming increasingly rare, as the company has full responsibility for ensuring there’s enough money in the pot to pay retired employees’ pension income. This can prove expensive. The most common type of DB pension is final salary, where your income is based on your salary when you left the company. But some organisations also offer career average DB pensions, based on your average salary.

Defined contribution (DC)

This is now the most common type of pension. Money paid in by you and your employer is invested by the pension provider. The idea is that these investments will grow enough over time to provide a worthwhile return to help fund your retirement. But, as we all know, investment performance is not guaranteed, so the value of your pension pot when you retire isn’t set in stone. When you retire, you can take the cash out (all at once or gradually over time), leave it invested or use it to buy an annuity.

Personal pensions

A personal (or private) pension is one that you set up yourself and choose how much to pay into. You can contribute a regular amount or occasional lump sums. If you wish, you can take out a personal pension even if you already have a workplace pension. You can opt to manage it yourself or choose a provider that will manage the pension for you.

As with workplace pensions, you get tax relief on money that you pay in, which boosts the value of your pension pot.

Almost all personal pensions are defined contribution (DC) schemes so, as with workplace DC schemes, there’s no certainty over how much you’ll have in your pot when you retire; it all depends on the performance of your investments.

There are 3 main types of personal pension:

  • Standard/simple personal pensions. These are offered by most large pension providers and some newer challengers to the market. You can usually choose the type of investment strategy for your pension pot (e.g. high vs low risk or a focus on ethical investments), but you don’t have nuanced control over your investments. Instead, the strategy is applied and managed by the pension provider.
  • Stakeholder pensions. These are similar to standard pensions, but there are strict government rules about how they’re managed. Annual management charges are capped (though they’re not always the lowest available), they allow low minimum contributions and you can stop and start payments and transfer out at no cost. Investment options tend to be limited.
  • Self-invested personal pensions (SIPPs). SIPPs give you much more control over how your money is invested. You choose which specific investments you put money into and actively manage those investments. There’s typically a wider and more sophisticated range of investment options than other personal pensions, though this choice may come with higher investment charges. They tend to be better for more experienced investors that make larger contributions and/or have a larger pot.

In the same way as with workplace pensions, when you retire, you can take money out of a personal pension scheme, leave it invested and/or buy an annuity.

Is it worth paying into a pension?

Zoe Stabler

Finder expert Zoe Stabler answers

For some, retirement may seem a long way away. But there’s a good chance that, for many of us, our “golden years” will make up at least a quarter of our lifetimes. And who wants to spend that much time having to scrimp and save?

The sooner you start paying into a pension, the more bang you’ll get for your buck when you retire. With DC pensions, which make up the bulk of schemes now available, starting early gives your pension investments the longest possible time to grow and maximises your chances of a decent retirement income.

If that wasn’t incentive enough, few other savings schemes offer effectively free money to top up your savings. If you pay into a workplace or personal pension, the government rewards you with tax relief (so, basically, you don’t pay any tax on the money you pay into a pension). Plus, if you have a workplace pension, your employer usually has to add to your pension pot on your behalf.

When you put it like that, it seems like a no-brainer. Of course, in reality, it may not be that simple, and if you’re struggling to even pay your household bills, the idea of investing for 30 or 40 years down the line might be well down your priority list. But as soon as you can afford to pay into a pension, do so. It will pay dividends in the long run.

How does tax relief on pensions work?

As long as you don’t pay more than a certain amount per year into a pension, the contributions you make usually aren’t taxable. How you benefit from this tax relief can work in 1 of 2 ways:

  1. Net pay. This applies to many workplace schemes and means that pension contributions are paid directly from your salary before any tax is paid. You only pay tax on the remainder after your pension is paid. With this method, whatever rate of tax you pay, you get full tax relief without needing to claim it.
  2. Relief at source. This applies to some workplace schemes and all personal pensions. Your pension contributions are paid from your income after tax. The pension provider will claim 20% in tax relief from the government and add this to your contribution. If you’re a higher-rate taxpayer, you can claim back the extra tax relief through your tax return (if you complete one) or directly from HMRC.

Regardless of the method, tax relief means that your contribution to your pension pot will be topped up by at least 25%. So if you’re a basic-rate taxpayer and pay £100 into your pension, your pot will go up by £125. That £25 extra equates to 20% of the total amount, the same amount that you paid or would have paid in tax.

It’s worth bearing in mind that you only get tax relief on money you pay into pensions. When you start to receive your pension, you’ll pay the normal rates of tax on any income that exceeds tax-free allowances.

Find out more about tax relief, including limits on how much you can pay into a pension and still benefit, in our full guide to whether pension contributions are taxable.

How can I open a pension?

When you join a new employer, provided you earn more than £10,000 a year and are aged between 22 and state-pension age, you will be auto-enrolled into its workplace pension scheme by default. Not only don’t you have to do anything to open the pension, but you also have to proactively opt out if you don’t want to be part of the scheme. If you opt out and decide you want to join later in your employment, just let your employer know and it can arrange for you to be signed up.

To set up a personal pension, you can either choose a provider and set your pension up yourself (taking into account the things to look for in a personal pension that we’ve outlined further down) or ask a regulated financial adviser to recommend a provider for you.

Can I have more than one pension pot?

Yes, and in fact, by the time we retire, most of us will have several (on top of the state pension). That’s most likely to be the case if you’ve switched jobs several times and held a pension with each employer.

You can even be actively paying into more than one pension scheme at a time. For example, you may have 2 or more part-time jobs, each with its own workplace pension scheme. Or, even if you only have a single job, if you don’t feel that its pension scheme is going to give you enough to live comfortably in retirement, you might choose to boost it by also paying into a personal pension.

Where is my pension money held?

The money held in pensions is invested – typically in a mixture of funds, stocks, shares and government bonds. Investing your pension pot allows it to grow much more substantially over time than if it was held in cash savings alone. As with all investments, performance can be volatile, and in the short term, the value can go down as well as up. Over the long period, you’re likely to be paying into a pension; however, the periods of growth should outweigh any temporary downturns.

The government has its own pension scheme called the National Employment Savings Trust (NEST), which many employers join. Alternatively, your employer may choose another company to manage your investments. If you have a personal pension, you can choose your own provider. For example, you may specifically opt for a provider that focuses on ethical or sustainable investing.

Image of plant growing coins alongside the stat: 35% of the adult population say they don't have a pension.

How are pensions invested?

The types of investment, and the specific investments, will change over time. As you get closer to your retirement, your pension money will increasingly be moved into less risky investments to reduce the risk of those short-term downturns happening just before you need your money.

The investment of your money will usually be managed by the pension scheme provider, though you will have some say over the investment strategy. For example, if you plan to leave your pension invested following retirement, you may prefer to keep your money in higher-risk and (potentially) higher-reward investments, rather than having them moved into lower-risk options. Or, if you have a SIPP, you’ll be able to manage where your money is invested.

What charges do I need to pay for a workplace or personal pension scheme?

Whatever scheme you join, you’ll need to pay fees. The amount and type of charges can vary between pensions. Workplace pensions may have lower charges than personal pensions because your employer may be able to negotiate better terms in exchange for effectively “bulk buying” from the provider.

Common charges include an annual management charge, which covers the cost of running and managing your scheme and making investments, service charges and transaction fees (payable when investments are bought, sold, lent or borrowed). Not all of these will apply to every scheme, but there are several other charges that might. It all depends on the scheme.

Many pension charges are taken directly from your pot. This means that when you look at the performance of your investments, the cost of the fees will already have been taken into account. Not all charges work this way, though, so check the details before you sign up.

The total level of pension charges can vary significantly between providers and can have a big impact on the performance of your pension pot. So be clear up-front about what you’ll be paying and what you get in exchange. Other things to check are whether a scheme charges you if you stop contributions or to transfer your pension away to another provider.

What is auto-enrolment?

Auto-enrolment is a scheme set up by the government in 2012 that aims to make sure that people contribute to their pensions. The auto-enrolment rules mean employers are legally obliged to offer employees a pension scheme, which they must also pay into. If you take no action to opt out, you’ll be automatically enrolled in an employer’s scheme when you join a new company – hence the name. You can, however, choose to opt out if you wish.

From February 2019, the total minimum contribution into your pension pot if you’ve been auto-enrolled is 8%, of which your employer must pay at least 3%. In this case, you’d need to pay 5%. Some employers might voluntarily pay a higher amount into your pension. If so, you may be able to pay in less as long as the total contribution is 8%.

When must your employer auto-enrol you?

Your employer must automatically enrol you into its pension scheme if you meet the following criteria:

  • Are classed as a worker
  • Are aged between 22 and your state pension age
  • Earn at least £10,000 each year
  • Usually work in the UK

What happens to my workplace pension when I change jobs?

If you choose to change jobs, then the money paid into your pension by the time you leave (by you and your employer) is still yours. Once you leave, you can leave it where it is, consolidate it with other existing pensions or transfer it to a new provider. If you have a final salary (or defined benefit) scheme, it’s usually best to leave it where it is since to move it, you’d have to convert it into a defined contribution pension. Final salary schemes are often referred to as “gold-plated”, and for most people, are well worth keeping hold of.

Make sure you keep hold of the details to log into your account and keep your details updated. In particular, let the provider know if you move house so that you carry on receiving your annual pension statements. If you have lots of different defined contribution workplace pension pots, it could be worth consolidating them into one pot.

Is it worth getting a personal pension if I’m self-employed?

Yes. While self-employed people qualify for the state pension in the same way as anyone else (for example by making National Insurance contributions), you shouldn’t rely on it to give you the standard of living you’ll want in retirement.

Plus, while you won’t benefit from your employer paying into your pension, the tax breaks can still make a pension a much better option than other ways of saving for retirement.

While cash flow can make saving into a pension a bit trickier if you’re self-employed, you don’t necessarily have to commit to a regular monthly payment. Look for a pension scheme that lets you pay in bigger amounts when revenue is flowing in and pause payments when money is tight.

What should I look for in a personal pension?

When you’re selecting your own pension scheme, there are a few things you’ll need to consider above and beyond what you’d need to if you were paying into a workplace pension. These include the following:

  • The minimum or maximum level of contribution you can make
  • Whether you can pay in lump sums as well as regular contributions
  • Whether you have the ability to pause and restart payments into the scheme, without penalty
  • The guidance and support that the provider offers to help plan for your retirement and keep an eye on your investment options, such as online tools or a helpline
  • The range of investment options available to suit your preferences and appetite for risk
  • How much granular control you can have over exactly where your money is invested. If you want to be able to choose specific investments yourself, and manage how much money you hold in each, a SIPP could be the best choice
  • The charges for managing the scheme and moving your money around.

If you’re not sure where to start, you may want to seek independent financial advice. There will be a charge for this, but it will save you time and effort and help make sure you select the right scheme for your specific circumstances.

When can I start taking my pension?

There are different rules for the state pension vs personal or workplace pensions.

  • You can start receiving the state pension at the official state pension age. This used to be 60 for women and 65 for men, but it is now less clear cut as it depends on when you were born. For those retiring now, it’s 66. For those born after 5 April 1960, there will be a phased increase to age 67 initially and eventually to age 68. You can check your state pension age on the website.
  • With workplace or personal pensions, you can usually start taking your pension from age 55, though the rules for some schemes may be different. There may be more restrictions on defined benefit (or final salary) schemes, which typically run until age 65. While some schemes may let you start taking your pension earlier than this, this may impact how much you get over the long term.

Is money I withdraw from my pension taxable?

In most cases, yes; you’ll pay income tax at the same rate as you would on employment income. The tax rate depends on how much income you receive each year. However, there is one notable exception to this rule.

From the age of 55, you are allowed to withdraw 25% of the total of your pension pot (excluding the state pension) as a tax-free lump sum – provided that the total value of your pension doesn’t exceed the maximum lifetime allowance. This applies to both defined contribution and defined benefit pensions. With the latter, the rules of the scheme will determine how much you can withdraw as a tax-free cash lump sum and your subsequent regular income will be reduced accordingly.

What happens to my pension when I retire?

As soon as you begin contributing to a personal or workplace pension, it can’t be withdrawn easily. It must stay in the pension pot until the age of 55.

At this age, you can withdraw 25% as a tax-free lump sum. The rest should ideally provide you with enough income for the rest of your life. With defined contribution schemes, you’ll need to decide what you want to do with the money in your pension pot in order to give you that income.

It’s up to you to decide when (from age 55) you want to retire and to begin planning as you approach your retirement age. Some schemes, in particular defined benefit schemes, may have a default age at which they will start paying you an income. If you want to change this, you will need to check the terms of the scheme and let your provider know.

Bear in mind that your official state pension age – the age at which you will start receiving the state pension – may be different to the age at which you consider yourself retired and start drawing the rest of your pension.

How do you receive money from a pension?

Typically, by the age of 55, you’ll be able to withdraw 25% of your pension pot (excluding the state pension) tax-free.

What happens to the rest of your pot depends on the type of pension.

With both the state pension and defined benefit schemes, you’ll receive a regular income once you start receiving them.

With defined contribution schemes, you’ll need to make a decision on what to do with the money in your pot. There are 4 main options. You can do just one of these, or take a mix and match approach.

  1. Buy an annuity. This is where you use some or all of your pension pot to take out a form of insurance product that gives you a guaranteed income for the rest of your life (or for a fixed term, depending on the product). How much you’ll get varies between providers, so if you want an annuity, it’s worth shopping around. The main benefit is the certainty of a guaranteed income, but you won’t have as much control over your money as if you left it invested, and if stock markets rise, you won’t reap the rewards.
  2. Take the whole pot out and do with it as you wish. For example, you could move it into another savings or investment account or splash out on a yacht (we wouldn’t recommend the latter unless you have another form of income).
  3. Withdraw lump sums as and when you need them, leaving the rest invested. If you choose this option, rather than being able to withdraw 25% as a single tax-free lump sum, the first 25% of each smaller lump sum you withdraw will be tax-free.
  4. Leave most of the money invested and take a regular income, known as pension drawdown. This has become one of, if not the, most popular pension withdrawal options. You can take out as much or as little income as you want and pay income tax at the relevant rate, based on how much you withdraw over the year. Because most of your money remains invested, you’ll continue to benefit from stock market rises, but also bear the risk of poorer performance periods.

How do I know the amount of pension I’ll get?

You can check how much state pension you’re likely to receive by getting a state pension forecast.

For existing pensions, your provider should send you an annual statement giving you an indication of how much you might receive at your selected retirement date based on the scheme’s current value.

If you want to get a sense of how much you might get based on making certain contributions over your lifetime, MoneyHelper – the government-backed money advice website – has a helpful pension calculator.

Can I track down existing pensions?

Yes. If you’ve stopped receiving pension statements for a scheme you’re confident you paid into, perhaps because you’ve moved house and didn’t get round to updating your details, you can get in touch with the provider and ask for details and to start receiving statements at your new address. If you’re not sure how to contact the provider, for workplace schemes try contacting your employer in the first instance. Failing this, the government has a free Pension Tracing Service. Just pop in the provider or your employer’s name, and the search will let you know its contact details.

How can I get advice about my pensions?

There are services that can help you search for a regulated financial adviser based on what you’re looking for, including the government’s MoneyHelper website, the Society of Later Life Advisers, The Personal Finance Society and Unbiased. Or for more general information and guidance, you can call a MoneyHelper pensions specialist on 0800 011 3797 or use its webchat.

Is the money in my pension safe?

The type of protection your pension has depends on the type of pension you’ve got:

Pension typeType of protection
Defined contributionYour pension is protected by your pension provider. Check if the provider is covered by the Financial Services Compensation Scheme (FSCS). This could mean you’re entitled to up to £85,000 compensation if the provider goes bust.
Defined benefitThis pension is protected by your employer, which is responsible for making sure there’s enough money to pay the agreed amount. If the employer goes bust, your pension money is ring-fenced and protected. You’re usually protected by the Pension Protection Fund if your employer is unable to pay your pension.

Bottom line

For most people, paying into a personal or workplace pension is the best way to save into retirement, thanks to the tax breaks and the possible employer contributions. If money’s tight right now, it may not be your top priority. But if you don’t want money to be even tighter when you retire, it makes sense to join a pension scheme as soon as possible. Doing so could make all the difference between spending your golden years enjoying life and having to count every penny.

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This article offers information about investing and the stock market, but is not personal investing advice. The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please get professional advice, for example from a financial adviser.
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