What is a pension?

Pensions are a long-term, tax-efficient way of saving for the future. There are different types of pensions, each offering flexible ways for you to access your savings from the age of 55 (rising to 57 in 2028).

We’ll take you through the different types of pensions you can choose from, how they work, and the benefits of saving into one.

Remember that the earlier you start investing in a pension, the more money you could have when you eventually retire.

 

The different types of pension

There are three main types of pension.

Personal pension

This is a pension you set up yourself with your chosen provider, and where you decide when and how much to pay in. There are also self-invested personal pensions (SIPPs), which let you manage your own investments.

What you get at retirement depends on what you’ve paid in and how your investment’s performed. You’ll also benefit from tax relief on the money you save.

Anyone can take out a personal pension. Depending on the type you have, there are different options when it comes to how you want to take your money when you retire.

Our Ready-Made Pension is a personal pension, which you can find out more about today.

Ready-Made Pension

Workplace pension

This is a pension your employer automatically enrols you into when you start working for them. When you pay into this pension from your salary, your employer does too. Plus, you'll also benefit from tax relief.

There are two types of Workplace pensions:

  1. Defined contribution – Contributions from you and your employer are invested to help build your pot and provide an income in retirement. What you get at retirement is based on how much you’ve contributed and how your investment’s performed.
  2. Defined benefit (final salary scheme) – Your employer pays you an income based on your salary and how long you've worked for them, rather than the amount you’ve contributed.

State pension

This is a pension provided by the Government when you reach the State Pension age of 65. This will rise to 66 from April 2026, 67 by March 2028, before eventually increasing to 68 years old.

To qualify for the State Pension, you need to have paid at least 10 years of National Insurance contributions. And at least 35 years to receive the full State Pension. How much you receive depends on how much National Insurance you've paid whilst working.

You can check your State Pension forecast and find out your State Pension age at gov.uk.

How do pensions work?

We can help you understand how your pensions and investments work.

Pay into your pension

If you have a personal pension, you can choose to set up regular monthly contributions, transfer in pensions, or make one-off, lump-sum payments.

For workplace pensions, contributions are arranged by your employer, where a percentage of your pay is added to your pension automatically each payday.

HMRC adds tax relief

Tax relief is where HMRC tops up your pension contributions. If the basic rate of tax is 20%, for every £80 you add, HMRC adds an extra £20. Higher or additional rate taxpayers could benefit from extra tax relief through self-assessment.

Tax treatment depends on individual circumstances and may be subject to change.

Your money is invested

Investment options vary between pension types and providers. Most workplace pensions invest your money in a portfolio of assets (including shares, property, and bonds). You move from higher to lower risk assets as your near retirement (known as ‘lifestyling’).

With a personal pension or SIPP, you choose the funds to suit your risk appetite and retirement goals. Some providers offer ‘ready-made’ portfolios with lifestyling, where the hard work of choosing investments is done for you.

Taking your money in retirement

When the time feels right to retire, there are several ways to access your pension. You decide how you want to receive your money, with the first 25% normally being tax-free.

Why have a pension?

 

If you don’t save enough into your pension, you may have to work longer and retire later, or even lower your expectations for retirement.

Here are just some reasons to pay into a pension:

  • Income for your retirement – your State Pension alone may not be enough to support you in retirement. Paying into a workplace or personal pension could help offer you a more financially secure future.
  • Grow your money – pensions are a long-term investment. They could offer more potential growth compared to a savings account, helping you beat the rate of inflation.
  • Tax relief on the money you save – for every £80 paid in, the government should pay in £20 in tax relief. If you pay over the basic rate of income tax, you may qualify for additional tax relief, receiving a tax-free lump sum when you retire.
  • Employer contributions – your current employer will often pay in a percentage (up to a certain amount). It’s good to think of employer contributions as pension savings you wouldn’t have otherwise had.

If you want a more short-term way to save or think you may need to access your funds before you’re 55 (rising to 57 in 2028), you may want to consider a savings account, ISA, or general investment account (GIA).

Benefits of investing early

The earlier you invest in a pension the better, as this will give your savings more time to grow.

Both Mark and Jemma are investing in the same pension scheme. They each start with a £10,000 initial investment, making monthly payments of £250, including tax relief and employer contributions.

The main difference between them both is when they started. Mark began investing when he was 25 years old. Jemma started when she was 35. If we imagine their investment grew by 5% each year until they reach age 55, Mark could have nearly £163,000. Whereas Jemma could only have around £100,000.

Despite both paying in the same amount to the same scheme, Mark gave his investment more time to grow by contributing early.

Please note that this graph is a guide for illustration purposes only and not a reliable indicator of future performance.

Pensions are a long-term investment. The retirement benefits you receive from your pension plan will depend on a number of factors including the value of your plan when you decide to take your benefits, which isn’t guaranteed and can go down as well as up. The value of your plan could fall below the amount(s) paid in.

How much should I pay into my pension?

 

How much you decide to pay into a pension is based on your personal circumstances. This depends on the lifestyle you want for retirement, and how much you pay into your pension today.

That’s why it’s important to know what you can afford to pay in. This could be smaller, regular payments or larger contributions less often. Remember, you’ll get government tax relief on any payments you make into your pension. 

Minimum contributions for workplace pensions are 3% of your annual salary from the employer and 5% from the employee. Some employers may match employee contributions up to a higher percentage. 

Our pension calculator could give you a guide as to whether your pension is on track to offer you the retirement lifestyle you want.
 

Pension calculator

More about our Ready-Made Pension

Opening a Ready-Made Pension

With our personal pension, our team of experts invest your money based on your chosen retirement age. We then lower the level of risk as you near retirement to help preserve your pension value. We do all the hard work, so you don’t have to.

Ready-Made Pension

Looking to combine your pensions?

If you have any pensions that you no longer pay into, you can combine them into a Ready-Made Pension. This could make things easier for you to manage. Transfers must be at least £10,000 when opening an account. Once opened, transfers can be £1,000 or more.

Combine your pensions

Our top 10 pension tips

 

Discover how to make your pensions work harder for you. Find out about growing your pension, maximising your contributions, and accessing your retirement savings.

 

Our top pension tips

How and when to take your pension

Our Ready-Made Pension offers flexible options, letting you access your pension when the time is right, and in a way that suits you.

  • Flexible access (flexible access drawdown) – Keep your money invested but take taxable withdrawals whenever you like (first 25% is tax-free).
  • Your pension as cash (encashment) – Take part or all your pension as a cash lump sum (first 25% is tax-free, with the rest subject to tax at your income rate).
  • Leave it invested – You can keep working and decide when and how to access your pension.

You can also take your pension as an annuity, which guarantees a regular income for life (first 25% being tax-free). Our Ready-Made Pension doesn’t offer an annuity option. However, we can help you find an annuity provider if you want to take your benefits that way.

Please see the Retirement options page for more information.
 

Retirement options

Frequently asked questions

  • The most you can save into your pension is £1,073,100. This is your ‘lifetime allowance’ and is calculated across all pensions (except for the State Pension). This is set to be abolished in April 2024.

    You can contribute the equivalent of 100% of your earnings, or up to a maximum of £60,000 (whichever is lower).

    You can carry forward up to three previous tax years’ worth of unused allowances.

    Find more information about your pension lifetime allowance and annual allowance at gov.uk.

  • One of the benefits of investing into a pension is tax relief. If the basic rate of tax is 20%, for every £80 you pay in, the government will top this up with an extra £20.

    If you’ve told us you’re eligible, we’ll add basic rate tax relief automatically to any regular or one-off contributions you make into your Ready-Made Pension. If you’re a higher rate taxpayer, you can claim additional tax relief through your self-assessment tax return.

    How much you can pay in without a tax charge will depend on your circumstances.

    • You can normally pay up to £60,000 (the Annual Allowance) into your pensions each tax year without paying a tax charge (or up to 100% of your taxable yearly income if less).
    • If you’re not working and don’t have any income, you can still pay in £3,600 each tax year (you pay in £2,880, with £720 tax relief).
    • If you’re a high earner, a lower limit could apply known as Tapered Annual Allowance. See further information at www.gov.uk.
    • If you’ve taken out a taxable cash sum or flexible income, the amount you can contribute without paying a tax charge is limited to £10,000 (the Money Purchase Annual Allowance).

    Tax treatment depends on your individual circumstances. Your circumstances and tax rules may change in the future.

  • If you would like financial advice, you could speak to an Independent Financial Adviser. Unbiased will let you find a local adviser based on your requirements. There will be a charge for this service.

    You get free help and guidance through Pension Wise. If you’re over 50, you’ll also benefit from a free 60-minute appointment.

    Alternatively, our partners Schroders Personal Wealth could also help. They provide personalised advice on a range of different products and services. It all starts with a free, no obligation chat, then a financial plan that’s tailored to you. To be eligible, you’ll have at least £100,000 in sole or joint savings, investments or personal pensions, or sole income of at least £100,000. Fees and charges may apply.