What you'll learn 
  • What a pension is
  • Differences between workplace and personal pensions
  • What the State Pension is

What's a pension?

A pension is a long-term investment that helps you save for your retirement in a tax-efficient way.  

  • Your pension is normally invested in funds. If you live in the UK, the Government will normally give you tax relief on top of your contributions. The amount of tax relief you’ll get will depend on how much you earn.
  • You usually make regular or single payments to your pension through the company managing it. They’ll send you annual statements. These will show you how much your pension is currently worth and how much it may be worth when you reach your selected retirement date.

A fund gives you access to a variety of investments, company shares and other types of investments, like bonds and property, which are chosen and managed for you by a fund manager.

  • A workplace pension is provided by your employer when you join the company. A percentage of your pay is paid into your workplace pension automatically every payday. You can choose how much you pay in, but there is usually a minimum amount.

    Did you know:

    • UK employers are required by law to automatically enrol all eligible employees into a pension and pay into it on your behalf. This is on top of any money you pay in.
    • If you don’t want to be a member of the pension, you can choose to opt out.
    • You’ll normally receive tax relief on your contributions. 
    Here’s an example:

    John pays £80 into his pension scheme each month
    + £80.00
    His employer puts in £60 + £60.00
    And he gets tax relief of £20* = £20.00
    That means £160.00 is going into John's pension from his £80 contribution   £160.00

    *If you are a Scottish or Welsh taxpayer the tax relief you will be entitled to will be at the Scottish or Welsh Rate of income tax, which may differ from the rest of the UK.

    We've based this example on automatic enrolment, where the minimum contribution is 3% from the employer, 4% from the employee and 1% in tax relief. This would be the minimum automatic enrolment contribution for someone with pensionable earnings of £24,000 each year. Many workplace pension customers may get tax relief in a different way. Tax rules can change.

    There are two main types of workplace pension:

    Defined contribution

    This is the most common type of workplace pension.

    Money paid in by you and your employer is invested by a pension company like us. How much you’ll get back will depend on:

    • what’s paid in 
    • how the investments have done 
    • charges 
    • how you decide to use your pension savings.

    There is no guaranteed income or pension value attached to this type of pension.

    Defined benefit 

    This type of pension, sometimes called a 'final salary' pension, is a lot less common now. 

    • It normally provides a guaranteed income for life (an annuity). This is based on how long you’ve worked for your employer and your earnings.
    • If you don’t want to buy an annuity, you may be able to transfer to a defined contribution pension, which will give you more options. If your defined benefits are worth more than £30,000, you’ll need to speak to a financial adviser. They’ll normally charge you for any advice.
    • You may not have to pay into a defined benefit pension.
  • A personal pension is a defined contribution pension that you, or your financial adviser, select.. You choose the pension company and how it’s invested and pay the contributions yourself. 

    You normally get tax relief on your contributions. The money you’ll get from a personal pension in retirement will depend on:

    • how much has been paid in
    • how the investments have performed 
    • charges
    • how you decide to take your pension savings.

    Other types of personal pension:

    • stakeholder pensions have specific Government requirements, for example there’s a maximum charge of 1.5% in the first ten years and 1% after that. There’s a minimum contribution of £20.
    • self-invested personal pensions (SIPPs) allow you to make your own investment decisions from a much broader range of investments.
  • Your pension might offer what is known as a lifestyling option. This automatically moves from higher-risk investments in the early years, when you can normally afford to take more risk, to lower-risk investments, as you approach your selected retirement date. 

    With newer lifestyle options, as you move closer to your retirement date, the investments you’re in will depend on the retirement option you selected. This could be cashing in your pension savings, buying an annuity to provide a guaranteed income for life, or remaining invested to draw an income when you want.

  • The State Pension is a guaranteed regular payment for life you get from the Government once you reach the state pension age, provided you have at least ten years’ worth of qualifying national insurance contributions. Your state pension age depends on when you were born.

    The amount you get will depend on the length of time you have made national insurance contributions. The government will then pay you your state pension – a guaranteed income – for the rest of your life. 

    For men born before 6 April 1951 and women born before 6 April 1953, read more about the State Pension here

    For men born on or after 6 April 1951 and women born on or after 6 April 1953, read more about the new State Pension here

    Check your State Pension forecast

    For more information about pensions please view our helpful video:

    What is a pension?

    Read more on the different types of pension on the Money Helper website

    National insurance is a tax on earnings and self-employed profits paid by employees, employers and the self-employed to help fund things like the NHS.

What next?

We hope this information has helped, if you want to understand more go back to learn more about investing.

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