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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 gov.uk 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.

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.

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.

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%.

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 gov.uk 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:

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.

Guilt-edged stocks: How investors are reacting to war

Finder published a paper in April 2022 exploring British attitudes to investing during controversial events. This report features findings from our survey of 2,002 adults on how guilty they feel about investing in “sin stocks” and the actions they would take as a result, including specific findings on pensions. It also features insight from investing experts including Dr Vikram Finavker from The London Institute of Banking and Finance, Dr Matthew Partridge from MoneyWeek, Emma Wall from Hargreaves Lansdown and Sam Dickens from IG.

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Frequently asked questions

• Can I take money out of a pension before I retire?

  Money placed in a personal or (in most cases) workplace pension can’t usually be accessed until you turn 55. You don’t have to be retired from work to start taking your pension from this age. Some people choose to stop working full time and instead receive income partly from their pension pot and partly from a part-time job. You can only access your pension pot before the age of 55 in exceptional circumstances. These might be if you need to retire early due to serious ill-health, if you’re terminally ill or if your pension scheme specifically allows for earlier retirement than normal because of your career choice (for example, if you’re a professional sportsperson).

• Can I manage my own pension?

  If you are setting up a personal pension and want to be able to manage your own investments, a self-invested personal pension (SIPP) is likely to be your best option. If you and your employer are paying into a current workplace pension, you are likely to have limited control over the management of this pension – though you should have a say over the broad investment strategy. You can consolidate former workplace pensions into a SIPP if you wish.

• Does my employer need to pay into my workplace pension?

  In most cases, yes. This is always the case if you were auto-enrolled into your pension scheme. If you do not meet the auto-enrolment criteria (aged between 22 and state pension age, earning at least £10,000 a year and usually working in the UK), you can still ask to join. However, if you earn below a certain level (£520 a month, £120 a week or £480 over 4 weeks), your employer does not have to contribute – though it may still choose to.

• What if I die before I take my pension benefits?

  If you die before you receive all or some of your pension benefits, your scheme will usually pay so-called “death benefits” to your dependants or, in some cases, other beneficiaries. How these are paid will depend on the type of pension you have. Check with your scheme if and how death benefits will be paid and any restrictions on who can receive them.

  • • Final salary schemes may pay an income to your spouse or partner or other dependants.
    • Defined contribution schemes may pay the full amount of your pot to named beneficiaries. In some cases, the recipients may be able to leave the money invested and take smaller lump sums or a regular income.

• Will my pension pay out for the rest of my life?

  It depends on the type of pension. From the date you start receiving them, the state pension and any defined benefit (or final salary) pensions will typically pay you an income for the rest of your life. If you have a defined contribution pension, you will only receive a guaranteed income for the rest of your life if you choose to buy an annuity. Otherwise, you’ll be responsible for managing how much you draw out of your pot so that it stretches for as long as you need it. While none of us knows for certain how long we’ll be around, what you choose to do with your pot and the rate at which you take out money may be influenced by your health and any associated impact on your life expectancy.

• Is it better to have a pension or savings?

  As is often the case, there’s no clear-cut answer to this. It’s always sensible to have a certain amount of money in “rainy day” savings in case you suffer an unexpected loss of income. A good rule of thumb is to keep 3 months’ worth of income in an easy-access savings account. And you may also have specific savings goals, such as buying your first property. However, if you’re saving specifically for retirement, paying into a pension is likely to be better than other savings or investment options because of the tax breaks on offer and, if it’s a workplace pension, the fact your employer usually has to pay in too.

• What happens to a workplace pension if you quit your job?

  If you leave your job, any workplace pension you’ve built up still belongs to you. The money will usually remain invested unless you proactively transfer it to another scheme (for example, you could choose to transfer it to your new employer’s scheme if you change jobs). There are some nuances to this depending on the type of scheme and how long you’ve been with the company, but your pension provider will write to you when you leave to explain your options.

• Can I still receive my pension if I leave the UK?

  Yes. This applies to all types of pension, but how you receive it will vary.

  • • • With defined contribution pensions, you can either transfer your pot to an overseas pension scheme or leave your pension in the UK and draw down the money in your new country of residence. If you opt for the latter, you have the same options as if you had stayed in the UK, but the pension provider may not be willing to pay money directly into an overseas bank account. If this is the case, you can keep a UK bank account to receive the income and transfer it yourself.
      • If you have a final salary pension, it’s best to leave this in place in the UK and keep a UK bank account to receive payments, transferring them as you need them. If you want to transfer your pension to an overseas scheme, you may lose out on some important benefits, so speak to a financial adviser first.
      • The state pension can be paid either into a UK bank account and transferred as you need it or directly into a bank account in the country you’ve moved to. However, dependent on where you move to, the tax payable and how much it increases by may be different to if you’d stayed in the UK.

• How many years do you have to work to get a full state pension?

  You have to have at least 35 years on your National Insurance record to qualify for the full state pension. These can be built up by doing the following:

  • • • • Working and paying National Insurance contributions
        • Being in receipt of National Insurance credits
        • Making voluntary National Insurance contributions.

  Subject to certain conditions, if you don’t think you’ll have built up the full 35 qualifying years by the time you reach state pension age, you can usually make voluntary “top-up” payments.

• Are there any limits on how much I can pay into workplace or personal pensions?

  Strictly speaking, there’s no limit. However, there is a limit on how much you can pay in tax-free. As of the 2024/2025 tax year, the annual tax-free contribution allowance is £60,000. There’s also a total lifetime allowance of £0 that applies when you come to withdraw your pension; anything above this level will incur a tax charge.