What is a pension?

A pension is simply a tax-efficient long-term savings plan. It’s a way to keep the money coming in when you retire. And the good news is, it’s not as complicated as you think. Pensions come in all shapes and sizes. They can be as simple or as complex as you want. 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 personal pension right now keeps 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 won’t get much interest, your pension savings are invested in the stock market.

What’s great about pensions is tax relief: For every £80 you invest, the government adds £20. If you’re a higher or additional rate tax payer you can make a claim for extra tax relief. Brilliant.

Just be aware though, there are limits on how much tax relief(Opens new window)(Opens new window) you can get each year. 

The plan is that the value of your money – your investment – grows. Then, when you reach a certain age, you gradually stop putting money in and start taking it out again, to use as income. You can even take up to 25% of your value as a tax-free lump sum. Simple as that.

Don't forget, the value of an investment can fall as well as rise and isn't guaranteed. You could get back less than you invest. 

Different kinds of pension 

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

There’s the State Pension – you save up through your National Insurance contributions (often without realising), then receive a regular payment from the Government when you’re 66 (depending on when you were born). But beware – the State Pension payment is less than you may think. You can work out how much you could get with the Government’s State Pension calculator(Opens new window).

If you’re over 22 and earn more than £10,000 a year, new rules mean your employer will probably automatically sign you up for a workplace pension. That means you save some of your pay each month and your employer adds cash to the pot too. There are rules around these put in place by the government to try and help everyone save for retirement.

And there are personal pensions, sometimes called private pensions, or simply ‘pensions’. People can arrange personal pensions on their own, or they can ask an Independent Financial Advisor 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 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, not having a regular salary can make it 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, which will work with your lifestyle. And remember, saving even a little regularly is better than nothing at all.

What happens when I retire?

The rules around pensions changed in April 2015. Now, when you reach 55, you have a lot more choice about 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

How much pension will I get?

The following video is about Your Options Explained and has a transcript (see below).

Every pension is different. The amount you get depends on things like the pension you choose, the age you start saving, how much you save and how long for, and how old you are when you take your pension. 

Pensions are an investment – and all investments can go down as well as up. So it’s a good idea to keep an eye on your pension to make sure you’re still on track for retiring. That said, pension products are still generally thought to be one of the safest ways of saving for retirement. 

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 for workplace and personal pensions.

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


The following video is about ISAs and Pension and has a transcript (see below).

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

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 an Independent Financial Advisor for advice, or you can talk to our team of experts.