Pensions 101: A simple guide to pensions

Pensions might seem complicated, but they don’t have to be. This easy guide covers all the essentials.

Feeling confused by pensions? That’s completely understandable. But you don’t need to be an expert to start preparing for your future. 

Once you understand these core principles, you’ll be in a much better position to plan for the life you want in retirement. 

What is a pension?

A personal or workplace pension is a way of saving for your retirement that offers better tax benefits than many other savings options. 

Pensions like these are different from the State Pension, which, on its own, may not be enough for the life you want in retirement. They aim to give you more financial flexibility and more income after you’ve stopped working. 

How do you pay into a pension?

If you’re a full- or part-time employee, aged between 22 and State Pension age, and earning more than £10,000 a year, your employer should automatically enrol you into a pension scheme. 

At least 8% of your qualifying earnings is usually paid into your workplace pension. This comes from both you and your employer, who must contribute at least 3%. Some employers contribute more than this.

Most often, these payments are automatically taken from your pay. Some employers voluntarily make higher pension contributions or increase their contributions when you increase your own.

How do pensions grow?

The money you pay into your pension is invested with the aim of making its value grow over the long term. Like any investment, there is a degree of risk involved, as the value of investments can go down as well as up. 

Although growth isn’t guaranteed, pensions are usually invested in a way that balances risk by spreading the money across different types of assets. That way, if one area performs poorly, this could be levelled out by investments performing well in another area.

Many of us are risk-averse, especially when it comes to our money. But avoiding risk completely could reduce the potential for higher returns over the long term, which can often make up a significant portion of a person’s final pension value.

When can you access your pension?

The earliest you can usually start accessing a personal or workplace pension is from age 55 (this will rise to age 57 on 6 April  2028). 

But you don’t need to start accessing your pension at this age. Many people leave their pension invested for longer to give it more time to grow.

How do pension taxes work?

Tax relief
When you save money into a pension pot, the government tops up your savings through tax relief on your contributions (and you can claim back more if you’re a higher earner).

If you pay income tax at the standard rate, every £80 you contribute is topped up by £20 to a total of £100.

Tax-free cash allowance
When you start accessing your pension, the money you take from it is classed as income, meaning you need to pay income tax on the amount you receive each year.

However, you can usually take 25% of your pension as tax-free cash, either as a single lump sum payment or in stages. 

Common pension terms explained

Heard these pension terms before, but not sure what they mean? We’re here to clear them up for you.

Annuity
When you’re nearing your retirement date, you can either choose to manage the way you access your pension yourself or take out an annuity. 

An annuity means giving some or all of your pension savings to an insurance provider, who will pay you a consistent level of guaranteed income either for life, or for a set period, depending on the terms of your agreement.

Some people opt to buy an annuity as they want to avoid running out of money if they withdraw too much or live longer than expected. Others prefer to have more control and manage their pension withdrawals directly. 

Consolidation
Throughout your career, you’re likely to have multiple pension pots. That’s because when you start a new job, your employer usually opens a new pension for you (different workplaces use different pension providers).

When you switch jobs, you’ll usually stop paying into your old pension and start paying into the new one. The money in the old pot stays invested until you start accessing it in retirement – the amount you’ve saved doesn’t get added to your new pension. 

Over time, it’s easy to lose track of old pensions, and it can be hard to understand how much you’ve set aside, and how much you may have in retirement. 

To overcome this problem, some people choose to consolidate their pensions, which means bringing all their pension pots together into a single pot. Your chosen pension provider can usually help you do this.

Consolidation isn’t the right choice for everyone though, so make sure you understand each pension provider’s terms and conditions before making your decision.

Defined benefit pension 
A defined benefit pension is a guaranteed income in retirement that's usually based on your final salary or average career earnings. 

They’re not very common anymore, but some public sector organisations like the NHS and the civil service do still offer them.

Defined contribution pension 
A defined contribution pension is based on the amount you and your employer make in pension contributions, which are then invested, and how well those investments perform. This is the most common type of pension scheme. 

Contributions to a defined contribution pension come from you and your employer. At least 8% of your qualifying earnings is usually paid into a workplace pension, and your employer must contribute at least 3%. You can choose to pay more, and some employers will increase their contributions too. 

Drawdown
A pension drawdown is a way of taking money gradually out of your pension and keeping the rest invested to give it even more opportunity to grow. 

You can take out the amount you need when you want to and keep the remaining amount in your account. 
Keep in mind, you’ll need to pay income tax on any money beyond your 25% tax-free cash allowance.

More help and guidance

Understanding the basics can help you feel more confident about your pension. Want to know more? You’ll find loads of helpful information here on MoneyPlus. For even more support and guidance, head to GOV.UK and Money Helper. 

If you want to get to grips with your pension, a simple first step is to check the amount you’ve invested already and consider whether you could afford to set more aside for retirement. 

Standard Life customers can do this by logging in to their account, either online or via the app. If you’d like to talk to us about your pension, visit our support page for FAQs and ways to get in touch.

The information here is based on our understanding in August 2026 and shouldn’t be taken as financial advice.

A pension plan is an investment. Its value can go down as well as up and could be worth less than was paid in.

Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.

Standard Life accepts no responsibility for information on external websites. These are provided for general information.