Learn about saving for retirement

There are different types of pension schemes available and no limit to how many you can have. Therefore, many people will have a combination of workplace pension and personal pension. These are in addition to the State Pension which is provided by the Government once you reach State Pension age.

Workplace pension

If you are employed, your employer will offer some sort of workplace pension (sometimes referred to as an 'occupational' or a 'company' pension) scheme. There are two main types of workplace pension, defined benefit and defined contribution.

Defined benefit scheme

A defined benefit scheme pays you a specific income when you retire. It's your employer's responsibility to contribute into the scheme and they may ask you to do so as well. 

You will then receive a retirement income which is based on how long you have been part of the scheme and what you earned whilst you were employed - rather than the amount of contributions made. Sometimes this is what you earned when you left (known as 'final salary') and sometimes it is based on an average salary (known as 'career average revalued earnings' or 'CARE scheme').

Defined contribution scheme

A defined contribution (sometimes called a money purchase) scheme requires you or your employer to make contributions into a pension pot* which is invested into funds with the aim of increasing its value. The size of your pension pot at retirement isn’t guaranteed and will depend on how much is paid in, how your investments perform and the effect of any charges.

You will then be able to access your pot of money from age 55.

*The value of your pension pot may fall as well as rise and any investment you make into a pension plan must remain invested until you decide to take your benefits which can be from age 55.

Personal pension

Anyone can set up a personal pension. This is a type of defined contribution scheme that you arrange yourself instead of through your employer. It is a good option if you are self-employed although employees can still have a personal pension to supplement any other pension plans they have elsewhere.

The Government is keen to encourage people to save for their retirement. So as an incentive, contributions you make into a pension scheme will benefit from tax relief, you’ll get tax efficient savings growth and the opportunity to take a tax-free lump sum from your pot.

The incentives have limits:

• Tax relief on your contributions is limited to 100% of your earnings. There is also an annual allowance which is currently £60,000 in the 2024/2025 tax year. If you earn more than the annual allowance and want to contribute 100% of your earnings to your pension, you will still get tax relief but a subsequent tax charge will apply.
• You usually pay tax if your pension pots are worth more than the lifetime allowance. This is currently £1,073,100 in the 2024/2025 tax year.

Tax relief

You will receive tax relief at your highest rate on contributions you make into a pension but how this works in practice is affected by the type of pension scheme you are in, how your employer takes your contributions from your pay and what your highest rate of tax is.

To give you a simple example, if you are a basic rate taxpayer in the 2024/2025 tax year your highest rate of tax will be 20%.

This means that for every £80 you contribute you receive £20 in tax relief so a total of £100 goes into your pot.

You can find out more about how this works if you earn below the income tax personal allowance or are a higher rate taxpayer on the Government website.

Tax efficiency

You pay into your pension pot and your money is invested in funds to hopefully grow the value of your pot over time. Unlike normal savings and investments, any growth in your pension pot is exempt from income or capital gains tax in the future, although it is not possible to reclaim the tax paid on dividends from UK companies.

Tax-free lump sum

In most cases, you will be able to take up to 25% of your pension pot as a tax-free lump sum any time after you reach age 55.

Employer contribution

If you're employed it's likely that your employer will also be paying into your pension too. This can be a significant benefit over other types of saving plan.

You can access your pension savings from the age of 55 onwards, or maybe earlier if you are in ill health. Your options include:

• Leave your pension pot untouched until you need the money
• Get a guaranteed income called an annuity where your pot is exchanged for a regular income for the rest of your life or a fixed term
  • You can usually take 25% of your pot as tax-free cash before buying one
• Take a flexible income direct from your pot and leave the rest of your money invested
  • You can either take 25% of your whole pot tax-free upfront and then take further taxable lump sums later, or
  • You can take lump sums only – where 25% of each would be tax-free and the rest taxable
• Take your whole pot as cash
  • Usually 25% would be tax-free the rest would be taxable
• Combine one or more of the options above. You can usually take cash and/or income at different times to suit your needs

These options will be different for your defined benefit scheme if you have been a member of one in the past.

As the decisions you make when you access your savings will have a significant impact on your financial future (and often cannot be reversed) we recommend you seek financial advice. Your employer may provide access to a financial adviser at retirement so do check if anything is offered. Please note that advisers may charge for their services. You can find one in your local area at unbiased.co.uk.

Pension Wise is a free and impartial service backed by the Government who will help you shop around and make sure that the decisions you're making are the right ones for you. You can book an appointment once you are aged 50 or over.

The Government will pay a 25% bonus on your savings each year up to a maximum of £1,000 per year. The bonus is calculated and paid in monthly.

You need to be between 18 and 40 to open a LISA. However, once it's open you can carry on paying in and receive the Government bonus until age 50.

The maximum you can pay into a LISA each year is £4,000. You may be aware that the overall limit you can pay into any ISA product each year is currently £20,000. This means that if you are saving the maximum into a LISA each year, you will only have £16,000 left to save into any other ISA. However, unlike pensions, your employer cannot pay into any type of ISA.

You can make full or partial withdrawals from your LISA once you turn 60 or earlier if you are terminally ill or using the money to pay for your first home. You don't need to pay any tax on what you withdraw.

However, if you withdraw money early from your LISA under any other circumstances, there is a withdrawal charge which is currently 25%.