What is a pension?
A pension is a tax-efficient way to save for the future. Essentially:
- You pay money into the pension throughout your working life
- Once you start working less or give up working all together you can use your pension to support you. You can take money from your pension once you reach age 55 (may be subject to change)
- The money you pay in is invested, giving it the potential to grow. Because it's invested, the value can go down as well as up and could be worth less than went in
- You can pass on the remaining money in your pension pot to your loved ones when you die. You can learn more about passing on your money in our guide
One of the great things about saving into a pension is the tax relief you get. This means that if you’re a basic rate tax payer, for every £100 saved into your pension the cost to you is only £80. This could effectively be even less if you’re a higher or additional rate tax payer. If you're a higher or additional rate tax payer you can normally claim any extra tax relief through your self-assessment tax return or by contacting HMRC.
|Your tax rate||You pay||HMRC pay||Total paid into pot|
When you decide to start taking money from your pension, 25% is normally tax-free. You then pay income tax on the rest. You can take this as one lump sum or in stages. Keep in mind that the level of tax relief available depends on your own financial circumstances and where you live in the UK.Our guide to tax in retirement
Cost to you of investing £100 in a pension
rate tax payer
Remember, tax rules and legislation can change, any information we give is based on our understanding of law and current HM Revenue & Customs practice. The table above uses UK tax rates. Personal circumstances also impact on tax treatment
This is the type of pension we provide, also known as a personal pension or workplace pension.
Here’s how it works:
- You pay in on a regular basis, and if you’re a member of a workplace pension scheme your employer will pay in too
- The amount you get back from your pension will depend on how much has been paid in, your pension’s investment performance and how you decide to take your money
- You can take money from this type of pension normally from age 55 (may be subject to change)
- One of the main things to remember is that you’re responsible for your investment choices with this type of pension
You can find out a bit more about defined contribution pension at the money advice service .
Interested in getting a defined contribution pension with us? You can find out a bit more about our products and apply here.
Defined benefit (final salary)
This is also known as a final salary or DB pension.
Here’s how it works:
- A defined benefit pension pays out a guaranteed income for life when you retire
- The amount you get when you retire depends on how long you’ve worked for your employer, your salary and the terms of the arrangement
- Depending on how your employer runs the pension scheme, you may be able to pay into this type of pension
- Your employer is responsible for the investment choices
You can find out a bit more about defined benefit pensions at the money advice service .
This is a pension income that gets paid to you from the UK government. How much you get will depend on how long you have worked and paid national insurance contributions for.
The age you start to get your state pension is set to increase, but currently its age 65.
When it comes to taking money from your pension, there are a number of different ways to do it. We can offer them all, not all providers will. The first 25% you take out is normally tax-free. You'll pay income tax on the rest.
Your options at a glance
*Usually you can’t pass on your guaranteed income for life, but you could add on options – for example, to pay a spouse's pension after you die, to keep paying the income for a guaranteed period, or to include value protection which provides a lump sum death benefit.
Your options – a little more detail
With a flexible income you can take as much or as little money out of your pension as and when you need it.
- Your money stays invested so it has the potential to grow
- You have the flexibility to take out money as and when you need it
- You can pass on your pot to your loved ones when you die
- Your remaining pot could fall in value if your investments don't perform as you'd expect. This means your future income could go down or you could run out of money
- You’ll need to regularly review your investments
- If you’re entitled to any means-tested state benefits, these could be affected if you take money from your pension
This is where you use your pension savings to buy a guaranteed income. This gives you an amount of money every year for as long as you live.
- The amount of money you get is guaranteed
- You'll receive your income until you die
- Your income won't be affected by investment performance
- Once you’ve decided you want a guaranteed income for life you can’t change your mind
- Your money normally doesn’t have the potential to grow, as you’ve agreed to buy a guaranteed income for life
- You can’t access your money as and when you need to
- Not every annuity option allows for money to be passed on to your loved ones
You can always leave your pension invested, giving it the chance to grow.
- Your pot will have the opportunity to grow
- You can pass on your remaining pot to your loved ones when you die
- You can keep your options open whilst keeping your money invested
- An income isn’t guaranteed, as the money you leave invested can go down as well as up in value
- You may need another source of income to support you, for example an ISA
- If you decide to take your money out later, there’s a chance annuity rates could have dropped. This could mean you get a lower income than you thought you may get
You can start taking cash from your pension from age 55 (may be subject to change).
- You can take money from your pension as and when you need it. The first 25% taken is tax free and the rest is taxable
- You have the flexibility to take your money as a lump sum or dip into it
- The rest of your pension will stay invested giving it the potential to grow
- You can decide to take a flexible income or a guaranteed income for life at any time
- You’ll pay income tax on anything you take out over the 25% tax free amount. This means you could be pushed into the next tax bracket, meaning you pay more tax
- If you’re entitled to any means-tested state benefits, these could be affected if you take cash from your pension
- You could run out of money if you take out too much money or if your investments perform poorly
- If you decide to take the rest of your pot as an annuity later, there’s a chance annuity rates could have dropped. This could mean you get a lower income than you thought you may get
This really depends on the type of lifestyle you want when you stop working. A handy rule of thumb is to try and save half of your age as a percentage of your annual salary. So, if you’re 30 when you start saving and earn £30,000 a year you should be saving 15% of your salary, or £4500 a year.