Everything to know about pensions
We explain everything to know about pensions so you can plan for a good retirement


Get the best money-saving tips, tricks and deals sent straight to your inbox every week. Make sense of your money in partnership with The Money Edit.
Thank you for signing up to The Money Edit. You will receive a verification email shortly.
There was a problem. Please refresh the page and try again.
Learn everything to know about pensions with our quick guide. Retirement may seem like a long way off in the future but saving into a pension is important if you want to stop working at a certain age and live well.
You may think the state pension from the government will have you covered - but this will only cover basic living expenses.
This article will explain:
- what pensions are
- types of pension
- how you get free money from your employer and the government with your pension
- how much you need to save to retire comfortably
Everything to know about pensions: What is a pension?
A pension is like a turbo-charged savings account. There are four main benefits to them:
- It is invested in the stock market so over time will benefit from higher returns than a bog standard savings account – even if there are falls in the market
- Free cash from the government, in the form of tax relief
- Free cash from your employer, which must pay in at least 3% of your annual salary
- A quarter of it is tax-free when you access it
Types of pension
There are generally three types: the state pension, final salary schemes and defined contribution schemes.
1. The state pension
The state pension is provided by the government when you reach 66. This will rise to 67 by 2028. The new state pension currently pays £179.60 a week, or £9,339 a year.
However, the amount you personally receive is based on your national insurance record. This is essentially the number of years you worked combined with any voluntary national insurance contributions you may have paid.
To receive the full state pension you need to have 35 years on your national insurance record.
2. Final salary scheme
The final salary pension (also known as defined benefit pension) is a bit of a unicorn. These workplace pensions pay you a guaranteed income when you retire based on your final or average salary and the years you worked for a company.
Most employers closed their final salary schemes because they were expensive to run, so you’re unlikely to be offered one today. But if you have one from a past employer then consider yourself lucky – they are gold dust.
3. Defined contribution pension
Defined contribution pensions are the most common type of pension and essentially pay out what you have paid in.
They work by paying you some of your wages each month alongside your employer’s contribution which is then topped up with tax relief. Basic rate taxpayers get a £20 top-up for every £80 they pay in, higher rate taxpayers get £40 for every £60 they put in and additional rate taxpayers get a £45 top-up for every £55 they put in.
If you are 22 or over and earn at least £10,000 from a job, your employer will automatically enrol you into a pension.
Your money is invested in stocks and shares. You can choose the investments or let the pension provider pick funds for you.
4. Stakeholder pension
You can also set up a private pension on your own. If you are self-employed or not working, then a stakeholder pension is often a good idea because you won’t be automatically enrolled into anything and don’t want to miss out on tax relief.
A stakeholder pension is another type of defined contribution scheme: you decide how much to pay in and it gets topped up with cash from the government. There’s just no contribution from an employer.
5. Self-invested personal pension
A self-invested personal pension (or SIPP) is a DIY version of the defined contribution scheme. This model gives you a wide range of options when deciding where to invest including investment funds, bonds, gold and even property.
What are the pension rules?
There are pensions rules to be aware of:
- The annual allowance limits your pension contributions to £40,000 (though if you earn over £200,000 this limit is lower)
- The lifetime allowance means you are only allowed to build up £1,073,100 in a pension
- You can withdraw the first 25% of your pension tax-free. The rest is subject to income tax
- You can access most workplace and personal pensions at age 55. This will rise to 57 in 2028
How much do I need to retire?
A lot of us are off-track to reach our retirement goals. For a comfortable retirement, the insurer Royal London claims you need to build up a pension pot of £260,000.
This should provide an annual income of around £9,000 if you buy an annuity at age 65. If you add that to the state pension (£9,339 a year) this gives you £18,000 a year as a regular income.
To save for that £260,000 pension you need to put aside: £390 a month if you are starting at age 25, £570 a month if you are starting at age 35 or £920 a month if you are starting at age 45.
These figures include tax relief but not employer contributions so if the company you work for adds something then these figures can be adjusted.
The questions to ask yourself include: Is £18,000 a year enough? What kind of lifestyle do you want in retirement? How do you feel about saving more money now in order to have more later?
You can play around with a pension calculator to see how much you need to save for retirement. You can put in how much you save today and it will project how much you could have when you retire. If you are disappointed with what you see we have 10 ideas to boost your pension savings.
If you want some concrete guidance, consider paying for a financial planner to help you reach your goals. You can find a financial planner at Unbiased or via CISI.
More on pensions
- Read how much Georgie Frost saves into her pension and why it is such a priority for her.
- Read how Naomi consolidated her six pensions and now pays into one scheme to have £300,000 by the age of 65.
Look After My Bills Newsletter
Get the best money-saving tips, tricks and deals sent straight to your inbox every week. Make sense of your money in partnership with The Money Edit.
Katie is staff writer at The Money Edit. She was the former staff writer at The Times and The Sunday Times. Her experience includes writing about personal finance, culture, travel and interviews celebrities. Her investigative work on financial abuse resulted in a number of mortgage prisoners being set free - and a nomination for the Best Personal Finance Story of the Year in the Headlinemoney awards 2021.
-
-
Octopus Energy relaunches energy tracker deal – we explain what you need to know and if it could save you money
If you’re an Octopus Energy customer, you may be able to save on your energy bills with the relaunch of its tracker deal. We look at how it works
By Sue Hayward Published
-
Three energy firms pay £8m in switching compensation - has your provider paid out?
More than 100,000 customers have received compensation after changing providers, but is now a good time to switch energy suppliers?
By Tom Higgins Published
-
Save £300 on your supermarket shop with cashback accounts
Banks, credit card companies and cashback sites are all offering cashback on your supermarket shop, but can you use them all to max out your savings?
By Vaishali Varu Published
-
More than 150,000 grandparents missing out on £1,500 state pension uplift: how to claim
Grandparents who provide childcare by looking after their grandchildren could be missing out on valuable state pension money worth thousands. We look at how much extra you could get and if you’re eligible
By Stephanie Baxter Published
-
Can you reclaim bank charges?
If you’ve incurred bank charges over the years, these can add up to hundreds of pounds – but can you get your money back? We look at whether you can make a claim and how to do it
By Stephanie Baxter Published
-
HSBC extends deadline for customers to secure bigger interest-free overdraft
HSBC customers now have until 10 May to increase their interest-free overdraft limit from £25 to £500. First Direct, Lloyds and Nationwide also offer similar support. We explain everything you need to know
By Katie Binns Last updated
-
New banking hub locations revealed - is there one near you?
The rise of banking hubs is in response to a stream of local branch closes. With more planned to launch soon, we look at what services they offer and where you can find one
By Stephanie Baxter Published
-
April 2023 premium bond winners revealed - are you a millionaire?
Two premium bond holders have won £1 million each this month and there are many other prizes for another 5,018,742 winners in April. We look at how to find out if you’ve won
By Stephanie Baxter Published
-
State pension underpayment warning - have you been underpaid and eligible for more than £11,500?
Thousands of retirees, mainly women, are still owed money by the government after being underpaid their state pension. We explain what you need to know
By Katie Binns Last updated
-
State pension age rise to 68 delayed - what it means for your retirement
The state pension age will stay at current levels for longer than expected after the government today confirmed that it has shelved plans to increase it to 68 by the late 2030s. We explain what it all means for you
By Stephanie Baxter Last updated