Pensions explained
With our help, starting a pension needn't be complicated. It’s your retirement fund and you’re in control. However, with all pensions, it’s best to start as early as you can and save hard. Most pensions are flexible and let you choose the most suitable way to invest your money so it has the chance to grow. Plus every time you pay money in, the taxman pays in too.
Find out which types of pension you’re eligible for, see what suits you best and discover what tax benefits you could get.
See how pensions work
Who pays in?
Here's our guide to how pensions work – in 3 easy steps.
The government wants us all to save for retirement, so the great benefit of paying into a personal pension is that the taxman pays in too. It's the next best thing to free money!
What the taxman pays in really boosts the amount that goes into your pension pot.
Extra tax relief
You can claim additional relief through your tax return. If you're a higher rate taxpayer, for every £80 you pay in, the taxman pays in £20 to your pension and reduces the tax you pay overall by another £20. If you're an additional rate taxpayer, your tax will be reduced by £30 (subject to the amount you earn).
The taxman
When you pay £200 into your pension, the taxman pays in £50.
You
Your pension is flexible – you decide how much you want to pay in. You can change this amount at any time and also pay in a lump sum if you want to.
What happens to the money?
Your investments over time
Time in years
Your pension fund
The earlier you start, the more payments you'll build up in your pension pot and the more opportunity this money has to grow.
The value of your pension pot depends on the value of your investments. During their lifetime they may rise and fall, if the stock market does. But you should focus on the long term. What matters is the value of your pension pot when you retire.
It's easy to keep track of your pension plan – you get annual statements and you can view it online whenever you want.
You're in control of your pension pot – how it performs depends on how much you put in, where it's invested and how much risk you're comfortable taking with it. Remember, your pension is flexible and you can adjust the amount you pay in at any time.
What happens when I retire?
You can access your pension pot from age 55 (although most people leave it until they stop work).
When you do, you can take up to 25% of your pot as a tax-free lump sum.
You need to turn the rest into a regular income you can live off – this will be taxed.
What happens when I retire?
Buy an annuity
Rather than hope the money lasts for as long as you live, you can use the rest of your pension pot to buy an income.
This is called an annuity. You then get a guaranteed taxable income for the rest of your life (the amount you get each month or year is based on a number of factors, such as your life expectancy).
What happens when I retire?
Income drawdown
Some pensions let you keep your pension pot invested (so that it still has the chance to grow) but take money out to live on.
How long the pension pot lasts depends on how much you take out – and how your investments perform.
To sum up...
- Every time you pay into your pension the taxman pays in at least 20% too.
- Your pension is flexible, you decide how much you pay in and you can change this at any time.
- Your money is invested, so that it has the chance to grow.
- The earlier you start, the more time it has to grow, and the more tax relief top-ups you get.
- You decide how it's invested – so you're in control.
- The final value of your pension pot is the sum of all the money paid in (minus charges) plus any growth your investments have achieved.
- You get a regular taxable income when you retire.
The information provided is for explanation purposes only. Investments can rise and fall and you could get back less than you invested. Please remember, tax relief on pensions may change. Its value depends on your individual circumstances.
Why start a pension now?
Starting early makes sense. Your money has more time to grow, and you will get more top-ups from the taxman.
If you start a pension early, you can pay in less each month and still match the pension of someone who starts later – or pay in the same which means you'll have more than they will, come retirement.
| Age 25 Retiring in 40 years | Age 35 Retiring in 30 years | Age 45 Retiring in 20 years |
|---|---|---|
| Age 25 Retiring in 40 years | Age 35 Retiring in 30 years | Age 45 Retiring in 20 years |
| ...and you saved £200 a month, this is how much income you'd end up with each year in retirement | ||
| £10,700 | £6,860 | £4,030 |
| The taxman would have given you: | ||
| £24,000 | £18,000 | £12,000 |
| So your pension pot would be worth: | ||
| £190,000 | £120,000 | £70,500 |
These figures are illustrations only to demonstrate potential fund growth, and the pension income you might get when you retire. We've made some assumptions: that the tax position doesn't change; that your payments remain constant; and that you'll retire at 65. We've assumed that your investments will grow at 7% per annum (you may get more or less than that) and that your annual charges will be 1%. Nothing is guaranteed.
