Pensions have the reputation of being confusing, but they needn’t be. Here we give a brief summary of what a pension is and why it might be a good idea for you.
What is a pension?
A pension is a long-term investment that aims to provide you with an income in later life.
There are a number of different pensions available. The State currently provides a basic income when you reach State retirement age, this age is determined by when you were born. With people living longer this age has risen over the years and will probably continue to rise, so many people choose to take out an additional pension. Your employer may provide a company pension (also known as occupational or workplace pension) and if they do it's a good idea to join. You can choose to have a personal pension (known as a defined contribution pension) where you can build up a pot for you to access usually after age 55.
With some company and personal pensions, you normally get to choose where your money’s invested. For our Stakeholder Pension Plan for example, our Stakeholder Investment Choices page explains where you can invest your money in more detail.
Why do I need a pension?
The earlier you start saving into a pension, the better chance you'll have of achieving the lifestyle you want in later life. By the time you want to take your pension benefits you may want to work less or retire.
Our cost of delay page shows how putting off starting a pension, even by a few years, could affect your retirement plans.
So what are the advantages of saving into a pension?
Well, one significant advantage is the tax relief. To encourage people to save for their retirement, the Government offers the following:
- Tax relief - the taxman will add tax relief to your pension contribution at the basic rate (currently 20%) – so for every £80 you pay, the taxman adds £20. So you get a total of £100 paid into your pension plan. This is a simple example and you can find out more about tax relief in our Pension FAQs and Jargon buster pages.
- Tax efficiency – money in your pension pot grows free from UK income tax and capital gains tax.
- Tax-free lump sum – when you choose to take your pension benefits, you are normally entitled to take up to 25% of your pension pot as tax-free cash.
The law and tax rates may change in the future, and the value of tax relief depends on your individual circumstances.
How do i access my money?
From 6 April 2015 the Government introduced different ways for everyone aged 55 and over to access their defined contribution pension pots. You can find out more information on our New Pension Rules page.