What is a pension?

In simple terms, a pension is a tax-efficient long-term savings plan. It’s a way to keep the money coming in when you retire. Pensions come in all shapes and sizes. It is important to find the right one for you though, so you can enjoy a happy, secure retirement.

small transparent pig with green outline representing saving for a pension

Why have a pension?

Most of us don’t want to work forever. Putting some of your earnings away in a pension right now could keep the cash coming in later on. Then, when you’re ready, you’ll be able to work less, or retire completely, and do the things you want to do.

Pensions explained  

2 stacks of coins

So what is a pension? The basic idea is straightforward. You save up, but rather than putting your money into a bank account where it may not get much interest, your pension savings are invested. Some will invest in assets such as stocks and shares, company or government bonds or the stock market (money purchase plans) whilst with others, the amount you’re paid is based on how many years you’ve worked for your employer and the salary you’ve earned so you don’t have to consider tax relief or investment returns (defined benefit plans). 

What’s great about pensions is tax relief: For example, say you were investing £80, the government adds £20 giving you a total contribution of £100. If you’re a higher or additional rate tax payer you can make a claim for extra tax relief.

Just be aware though, there are limits on how much tax relief(Opens new window)(Opens new window)(Opens new window)(Opens new window)(Opens new window) you can get each year. The value of any tax relief depends on your individual circumstances.

The plan is that the value of your pot – your investment – grows. Then, when you reach a certain age, you have many options as to how you take your retirement income. Our Retirement Planner website explains what these options are and how you can create a retirement plan that works for you. 

The value of your investments can go down as well as up, so the value of your pension fund isn’t guaranteed. It’s particularly important to remember this if you’re close to taking your benefits, or you’ve nominated part or all of your pension fund to drawdown, as your pension fund will not have much time to recover from any losses.

Different kinds of pension 

There are different kinds of pension. You can have more than one kind.

There’s the State Pension – where you receive a regular payment from the Government. The State Pension age – the earliest age you can start to receive your State Pension – has been gradually rising. From 2019, the State Pension Age will increase for both men and women, reaching 66 by October 2020 and then 67 between 2026 and 2028. Currently legislated to rise to 68 between 2044-2046, but the government has proposed bringing this forward to 2037-2039. But beware – the State Pension payment may be less than you think it is. You can work out how much you could get with the Government’s State Pension calculator(Opens new window)(Opens new window)(Opens new window)(Opens new window).

If you’re over 22 and earn more than £10,000 a year, by law, your employer has to enrol you in a workplace pension scheme. The means that your employer has to contribute to a pension scheme for you and you may need to contribute as well. There laws were put in place by the Government to try and help workers save for retirement.

And there are personal pensions. People can arrange personal pensions on their own, or they can ask a Financial Adviser to help. Employers can add cash to a personal pension too.

How do I get a pension if I’m self-employed?

If you work for yourself, you’re entitled to a basic State Pension, depending on how many qualifying years(Opens new window) of National Insurance contributions you’ve paid. You’ll also get tax relief on any savings you put into a personal pension plan. But self-employed people do miss out on some benefits – for example, as you don’t have an employer, you can’t be enrolled into a workplace pension, or get contributions from an employer. Plus, unless you’re able to pay yourself a regular salary, it can be harder to get into a saving habit.

So if you’re self-employed, you need to take action. Starting a personal pension or an ISA could be a good move. There are plenty of flexible options out there, that can work for the self-employed. And remember, saving even a little regularly is better than nothing at all.

What happens when I retire?

The rules around pensions(Opens new window) changed in April 2015. Now, when you reach 55, you have a lot more choice about what you can do with your pension pot.

You can choose to take your pension pot as a lump sum – and up to 25% of this can be tax free. You can use your pension pot to create a regular income (through buying what’s called ‘an annuity’) or keep your money invested and draw cash out when you need it. You can even combine the options to suit your circumstances – or if you’re planning on staying in work for a bit longer, you don’t need to do anything at all.

Two people sitting beside a jar of coins representing retirement funds

As annuity rates can change substantially and rapidly, there is no guarantee that when you do purchase an annuity the rates will be favourable. This could mean that your pension thereafter may be less than you hoped for.

How much pension will I get?

Pension products are generally thought to be one of the safest ways of saving for retirement.  That said - pensions are an investment – and the value of all investments can fall as well as rise. So it’s a good idea to keep an eye on your pension to make sure you’re still on track for your planned retirement.

How do I get a pension?

Ready to find out more? Remember, it’s never too early – or too late – to save for your retirement. The important thing is to get started, either by taking action yourself, asking a Financial Adviser for advice, or you can talk to our team of experts.

I’m sure I’ve got a pension. Somewhere… 

These days, most of us will have more than one job. That means it’s possible to collect more than one pension along the way. Bringing all your pensions together, in one place, could make it easier to keep an eye on your savings.   

If you’ve lost track of an old pension product, don’t worry. There’s lots you can do to track down an old pension, plus the Government offers a free tracing service(Opens new window) for workplace and personal pensions.

The following video is about Consolidation: Bringing Your Pots Together and has a transcript (see below).


Pensions aren’t the only way to save for retirement. Individual Savings Accounts  – or ISAs – could be a great way to plan ahead. You can choose to save with ISAs, a pension or a combination of both – whatever suits you.