A pension is a long-term investment. Its value can go down as well as up and could be worth less than was paid in. Laws and tax rules may change in the future. Your own circumstances and where you live in the UK will also have an impact on tax treatment.

What is a pension?

A pension is a tax-efficient way to save and invest money in the long term for when you decide to reduce your working hours in later life or stop working altogether. You can choose to start taking your pension money once you reach age 55 (subject to change) to help fund your everyday life.

Not every pension works in the same way, so this guide can help make their differences clear, how they work and which option might right for your needs.

Types of pensions

There are a few different types of pension plan that you might come across as you save money for life after you stop working.

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Personal Pension
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Workplace Pension
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State Pension

This is a defined contribution pension that you can choose to open and pay into yourself.

You can have these pension types as well as a workplace pension and the state pension.

HMRC will top up whatever you pay into a personal pension through tax relief.

Read our guide to personal pensions to find out more.

Your employer can also enrol you into a defined contribution pension scheme. You’ll make payments into your pension from your regular salary. The way payments are calculated will depend on the type of pension.

Alternatively, your employer might enrol you into a defined benefit pension plan. This is also known as a final salary pension, which we explain below.

Your employer will pay in and you'll benefit from tax breaks on the payments you make as well.

Find out more about workplace pensions here.

UK citizens will receive this pension from the government when they reach State Pension age.

Whether you get the full State Pension amount or not depends on your national insurance history.

Our guide can help you better understand how it all works.

What do we mean by Defined Contribution?

This is the type of pension we provide. Defined Contribution Pensions are what you’ll be saving into if you open a Standard Life personal 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 normally take money from your personal and workplace pension from age 55 (may be subject to change).
  • At age 55 you can also choose to take 25% of your total pension plan tax-free, and you’ll be liable to pay income tax on the rest.
  • One of the main things to remember is that you’re responsible for your investment choices with this type of pension.

We have a helpful guide that explains more about different types of Defined Contribution pension, including pros, cons and things to keep in mind.

Pension types explained

How do tax benefits work with personal pensions?

Money paid into a pension is then invested, which gives it the potential to grow over time. It will also be topped up by the HRMC thanks to tax relief. The table below shows the cost to you when making payments into your pension plan and how the tax relief works.

Tax bracket You pay HMRC pays Payment into pension Further tax relief claimed from HMRC Cost to you
Basic £80 £20 £100 Nil £80
Higher £80 £20 £100 £20 £60
Additional £80 £20 £100 £25 £55

You can also find out more about tax relief, your tax-free allowance and tax you might have to pay in our helpful guide:

Tax in retirement

How do tax benefits work with workplace pensions?

Workplace pensions and tax benefits can work differently. For more information, you can read our quick workplace pensions guide.

Read the guide

What is a Defined Benefit (final salary) Pension?

This type of pension scheme is offered by employers and will offer you a specific amount of money when you choose to retire.

Here’s how it works:

  • A Defined Benefit Pension pays out a guaranteed income for life (an annuity) 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 workplace pensions in our helpful guide:

Workplace pensions explained

Ways to take money from your pension plan

When you reach age 55 (subject to change) you can choose to take money from your pension plan. Keep in mind that you can choose a combination of these options if you have a Defined Contribution pension plan.

Keep in mind: If you have a Defined Benefit pension, you can only choose a guaranteed income for life (scheme pension) from the below options. Here’s a quick introduction to your options:

  • Flexible Income (drawdown): With this option you can take as much or as little money out of your pension plan as and when you need it. Anything you leave stays invested so it has the potential to grow. Keep in mind that as your money remains invested, its value could rise and fall. Read more on our Flexible Income page.
  • A guaranteed income for life: This is where you use your pension savings to buy a guaranteed income (also known as an annuity). It gives you a set amount of money every year for as long as you live. Read more on our Guaranteed Income page.
  • Take it all as cash: You can take your pension as cash from age 55 (subject to change) You can take the first 25% of your total pot tax-free and the rest is taxable. Read more on our page about taking cash.
  • Leave it invested: You can choose to leave your pension plan invested until you’re ready to take it, giving it a chance to grow. Keep in mind that the value of your pot could go down as well as up depending on how your investments perform. You still have the freedom to choose any of the other options at any time. Read more on our page about leaving your pension pot invested.

You can get even more detail on how each option works in our guide:

Ways to take your pension money

How much should I save into a pension plan?

It really depends on how soon you want to retire and what sort of lifestyle you want after you start working less or stop working altogether. It can be tricky to work this out if you’re years away, so we have a few helpful tools that can help you make a more informed decision.

Calculator

Pension Calculator

Take a look at our pension calculator to see how much your pension plan could be worth when you retire and if you’re saving enough for the future you want.

Calculator

Pension Calculator

Take a look at our pension calculator to see how much your pension plan could be worth when you retire and if you’re saving enough for the future you want.

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How much do you need to retire?

Our retirement tool can help you get an idea of your lifestyle costs in retirement. Give it a try to start building a picture of your everyday costs.

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How much do you need to retire?

Our retirement tool can help you get an idea of your lifestyle costs in retirement. Give it a try to start building a picture of your everyday costs.

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More about pensions

We have even more guides and insights to help you understand pensions.