What is a pension?

A pension is a long-term, tax-efficient way to help you save for your retirement. The aim of a pension is to help bring you financial security and a steady income once you’ve stopped working. Pensions come with tax advantages as well as the potential for investment growth.

Why do you need a pension?

Having a pension helps towards securing a comfortable standard of living in retirement. In the short term, life can feel very busy and retirement can seem far off, but there are many benefits to paying into a pension fund, including:

• Financial security in retirement
• Tax benefits compared to other savings options
• Employer contributions to your workplace pension can help your retirement fund grow more quickly
• We’re living longer, so your retirement could also be longer - and therefore more costly.

A pension is a vital tool for building the life you want in retirement. By contributing to a pension, you're investing in your long-term financial stability and lifestyle. 

How does a pension work in the UK?

Pensions in the UK help you save for retirement in a tax-efficient way. You make regular contributions, and if it’s a workplace pension then your employer adds money to your pension pot too. 

The government also boosts your retirement savings through tax relief. 

Your money is then invested in a diverse portfolio of assets, such as:

• Stocks 
• Bonds
• Commodities
• Mutual funds
• Real estate
• Alternative investments.

From age 55 (rising to 57 in 2028), you can usually access your private pension - taking up to 25% tax-free and using the rest to provide an income through drawdown, an annuity, or lump sums. 

If you’ve paid enough National Insurance, you’ll also receive the State Pension when you reach State Pension age.

The earlier you start, and the more you put in, the more beneficial it is to you long-term. Not sure where to start? Check our ‘What if?’ tool in the Just app.  

How does a pension grow over time?

Pensions grow through a combination of ongoing contributions to your pension pot, investment returns when the value of your investments increases, compound growth, and tax relief. 

• Regular contributions: From you, your employer, and tax relief from the government all add to your pension pot. The more you put in, the larger your pension pot will be.
• Investment returns: Pension funds are invested in various assets like stocks, bonds, and real estate. These investments can fluctuate in value, but given enough time well-performing investments can increase the value of your pension pot.
• Compound growth: Compounding is the process where the returns on your investments generate their own returns. For example, if your pension fund earns interest, that interest can be reinvested, and future interest will then be earned on both the initial amount and the accumulated interest.
• Tax benefits: You get tax relief on UK pension contributions, so for every penny you put in the government will top it up. 

How do you open a pension?

Opening a pension in the UK is usually very straightforward, although the process is a little different for each type of pension.

• Personal Pension: To open a personal pension, you would begin by researching pension providers, comparing their fees, the range of investment options they offer, and their past performance. After choosing a suitable pension plan you would decide how much you want to contribute and how often, and set up a standing order or Direct Debit for these regular contributions. It would be a good idea to review your pension on a regular basis and decide whether you need to adjust your contributions or even move to a different provider. 
• Workplace Pension: If you're employed, your employer will automatically enrol you in a workplace pension scheme provided you are over 22 and earn over £10,000. Both you and your employer contribute to your workplace pension, and you get tax relief from the government too.
• State Pension: Your State Pension will be set up automatically, and the amount you will receive will be based on your National Insurance contributions or National Insurance credits during the course of your working life.

Does everyone get a pension in the UK?

The  vast majority of people in the UK will receive some amount of State Pension once they reach State Pension age, but the exact amount they will receive will depend on their history of National Insurance contributions. To get the full amount you need 35 qualifying years of National Insurance contributions or National Insurance credits.

When it comes to private pensions, data from the Office for National Statistics indicates that:

• Approximately two thirds of people in the UK have some type of additional pension provision beyond the State Pension
• Almost a third of people expect to have to solely rely on the State Pension to fund their retirement. 

What if you don't qualify for the state pension?

If you don't qualify for the State Pension because you don't have enough NI contributions, you might still be eligible for Pension Credit, which is a means-tested benefit designed to help those on low incomes.

Is it worth paying into a pension?

In the vast majority of cases it is worth paying into a private pension if you want to make sure you have a steady income in retirement. The UK State Pension provides a basic level of income, but it may not be sufficient to maintain your desired lifestyle. 

For example, the full State Pension amounts to £11,973 a year in 2025/26, but that is quite a bit less than the £14,400 a year that Retirement Living Standards suggests is the minimum annual income currently required to fund retirement for a single person.The earlier you start paying into a private pension, and the more you put in, the more beneficial it is to you long-term. 

How to make pension contributions

Understanding how to make pension contributions is essential for building a secure income in retirement. If you understand how, when, and how much to contribute it can help you ensure you get the most benefit from tax relief and employer contributions, boosting your retirement savings.

• Workplace pensions: If you’re employed, you’re probably already enrolled in a workplace pension. Contributions are taken automatically from your salary before tax, and your employer adds money to your pension pot too - often matching what you pay in. Some employers also offer salary or bonus sacrifice schemes, where you give up part of your pay or bonus before tax, so more money goes into your pension and your tax bill is lower.
• Regular payments: If you’re managing your own pension, you can set up regular contributions by Direct Debit or standing order. This gives you control over how much and how often you pay in, and you can adjust the amount based on your financial situation.
• One-off contributions: You can also top up your pension with a lump sum - for example, from a bonus, inheritance, or savings. These one-off payments can benefit from tax relief too, helping your pot grow faster over time.

How much can you get in pension tax relief each year?

In the UK, you can contribute up to 100% of your annual earnings or, if lower, £60,000, into your pension each year and still receive tax relief. 

This £60,000 figure is the so-called Annual Allowance. It’s a limit which applies per person (not per pension) and you’ll likely pay tax if your contributions go over. 

The two main exceptions to this Annual Allowance figure are:

• If you have accessed your pension pot during the current tax year
• If your annual income is more than £260,000

If either of those exceptions apply in your case then your Annual Allowance will be a little lower.

Tax relief from the government

The UK government offers tax relief on pension contributions to encourage people to save for retirement. There are two main ways you can receive this tax relief:

• Relief at Source: Your pension provider claims tax relief at the basic rate of 20% and adds it to your pension pot. If you pay a higher rate of tax, you can claim the additional relief through your Self-Assessment tax return.
• Net Pay Arrangement: Your employer deducts your pension contributions from your salary before tax is calculated, reducing your taxable income.

Even if you don't pay income tax, you can still receive tax relief on pension contributions up to £3,600 per year.

Contributions from your employer

If you have a workplace pension then your employer will also contribute to your pension pot, often matching a percentage of your own contributions, which means your retirement fund will grow more quickly.

What are the different types of pensions in the UK?

There are three main types of pension in the UK: 

• The State Pension
• Workplace pensions
• Personal pensions

The State Pension

The government provides you with the State Pension when you retire, provided you have paid enough National Insurance contributions to be eligible. 

How does the State Pension work? 

The State Pension is a regular payment from the UK government that you can claim when you reach State Pension age. The amount you receive depends on your National Insurance (NI) contributions throughout your working life. 

To qualify for the full new State Pension, you need 35 qualifying years of NI contributions.

How do you claim your State Pension?

You need to apply to receive your State Pension, it’s not automatic. You can start your application up to four months before you reach State Pension age. You can do it online, by phone, or by post.

If you work past State Pension age, you can defer your pension, which may increase the amount you receive when you eventually claim it.

Is a State Pension taxable?

Yes, the State Pension is classed as taxable income in the UK. How much income tax you will pay on your pension income (if anything) will depend on your total annual income, and whether or not that total is above your annual Personal Allowance. 

For the tax year 2025/26, the Personal Allowance is £12,570, which means you’ll only pay tax on income above this amount. 

Workplace pensions

Workplace pensions are set up by your employer to help you save for retirement. 

Since 2018 all employers have been obligated to automatically enrol employees in a workplace pension if they meet the following three eligibility criteria: 

1. 22 years old or older
2. Working in the UK for an employer on a full time or part time basis
3. Earning at least £10,000 a year.

Defined Contribution pension schemes

Defined Contribution (DC) pension schemes are set up by your employer when you start working for them and are the most common type of workplace pension. 

Both you and your employer contribute to them. 

The money in your Defined Contribution pension pot is invested in assets like:

• Stocks
• Bonds
• Commodities
• Mutual funds
• Alternative assets. 

The performance of these investments will affect the value of your pension pot, which means the total amount you will have available at retirement can vary based on the performance of your portfolio of investments.

Defined Benefit pension schemes

With Defined Benefit pensions, the pension scheme pays you a percentage of your salary when you retire. How much you get depends on your final salary and how long you've worked for your employer. 

Personal Pensions

Personal pensions are designed to help individuals save for retirement independently of their workplace pension schemes. 

These pensions are typically defined contribution plans, meaning the amount you receive in retirement depends on how much you have paid in and how well your investments have performed. 

Personal pensions are a valuable tool for building a substantial retirement fund, especially for those who are self-employed or wish to supplement their workplace pension.

There are three main types of personal pensions:

• Stakeholder pensions
• Self-Invested Personal Pensions
• Standard personal pensions

All are tax-efficient ways of saving for your future but how they work differs in practice.

Stakeholder Pensions

Stakeholder pensions are a type of personal pension designed to be accessible and affordable for everyone, including those with low incomes or irregular employment. 

Stakeholder pensions are particularly beneficial for individuals who may not qualify for other pension schemes due to their employment status. 

Despite the introduction of automatic enrolment, stakeholder pensions remain a viable option for those seeking a straightforward and cost-effective way to save for retirement.

Self-Invested Personal Pensions (SIPPs)

Self-Invested Personal Pensions (SIPPs) provide the most flexibility and control over your retirement savings, allowing you to choose and manage your own investments. If you’re comfortable with making investment decisions and want to diversify your pension portfolio, then SIPPs might be an attractive option. 

You can invest in a wide range of assets through a SIPP, including:

• Stocks and shares
• Bonds
• Mutual funds
• Exchange-traded funds
• Commercial property
• Alternative assets.

Like all investments, they come with a degree of investment risk, so it’s worth doing your research first.

Click here to watch our ‘What’s a SIPP video’.

Standard Personal Pensions

Standard Personal Pensions are individual retirement savings plans that you arrange yourself, separate to any Workplace Pension that your employer might enrol you in. 

Standard Personal Pensions are usually prepackaged funds, managed by providers and set to differing levels of risk so you can pick one that matches your appetite and growth objectives. 

Some Personal Pensions may offer additional benefits and incentives, and perhaps some freedom to pick your own investments too.

What pension type is right for you?

 When deciding which pension type is right for you, you should take the following factors into account:

• Your employment status: If you are employed, a workplace pension with employer contributions is highly beneficial. If you’re self-employed, a stakeholder pension or SIPP might be the best option.
• Your risk tolerance: No one pension type is inherently more risky than another. Stakeholder and Personal Pensions usually come at different risk levels so you can pick one which fits your appetite and growth objectives. With SIPPs you choose your own investments so your fund will wind up as risky (or not) as you’re comfortable with. Risk is a double-edged sword: more equals higher growth potential but also more loss potential. It’s up to you to find your sweet spot.
• Flexibility: Consider how much control you want over your investments and how flexible you need your contributions to be.
• Your retirement goals: Think about your desired retirement lifestyle and how much income you will need to achieve it.

What are the benefits of opening a private pension?

Opening a private pension is a great step to take towards securing your financial future in retirement, and one that comes with a wide range of benefits:

• Tax benefits: When you pay into a private pension, the government adds tax relief to your contributions, effectively boosting your savings. 

• Flexibility and control: Some types of private pensions can offer a high degree of flexibility and control over your retirement savings. You can choose how much to contribute and when, allowing you to tailor your pension plan to your financial situation and goals. 
• Investment growth: Private pensions are typically invested in a diversified range of assets, including stocks, bonds, and mutual funds. This diversification helps to spread the risk and can lead to substantial growth over the long term.
• Accessibility: Private pensions are accessible to everyone, regardless of employment status. 
• Lump sum withdrawals:  When you reach the age of 55 (rising to 57 from April 2028), you can access your private pension and take up to 25% of your pension pot as a tax-free lump sum. 
• Employer contributions: If you have a workplace pension, which is a type of private pension that’s set up by your employer on your behalf, then your employer will contribute to your pension alongside your own contributions.
• Peace of mind: Having a private pension provides a sense of security and peace of mind, knowing that you are actively preparing for your future

How much do you need in your pension pot?

How much you need in your pension pot when you retire depends on your retirement goals. It’s important to think about the lifestyle you want in retirement and the amount of retirement income you will need to make that lifestyle possible. 

A common guide is to aim for a pension pot that gives you about two-thirds of your pre-retirement income. For example, if you earn £30k a year, you may want to aim for £20k a year. You can achieve this through a combination of your State Pension and your personal or workplace pensions. 

Think about your interests, your living expenses, possible healthcare needs and costs and any travel you might want to do. You can then use calculators like our ‘What if?’ tool to help you calculate your income. 

How can you find your old pensions?

It’s increasingly common to change jobs frequently, which can make it easy to lose track of old pensions. To help you find any missing pension pots, start by gathering all the details about your previous employment and pension schemes, such as:

• Old payslips
• Employment contracts
• P60s
• P45s
• Pension statements
• Letters or emails from pension providers.

Next, use the UK government’s free Pension Tracing Service to get contact details for your old pension providers by entering your former employers’ names. Then, contact those providers directly with your personal and employment details to check if you have any pensions with them. 

Many providers also offer their own pension-finding tools, and you can decide whether to leave your pensions where they are or combine them. It may take a bit of effort, but tracking down your old pensions is a smart step to make sure you’re not missing out on valuable retirement savings.

When and how can you access your pension?

When you can access your pension (and how you go about doing so) will depend on the type of pension scheme you have, and your current age. 

In the UK, you can typically start withdrawing from your private pension at age 55, although this will rise to 57 from 2028. 

With a Defined Contribution pension, you can:

• Take 25% tax-free
• Get regular income through drawdown or an annuity
• Or combine both approaches. 

Defined Benefit pensions provide a guaranteed income, usually from your scheme’s retirement age, which is all agreed up front. 

If you gain early access to your DB pension, which may be possible only on health grounds, then you’ll stand to receive the same pension value but your regular payment amounts may go down to reflect what’s now a longer pension timeline. 

Do you pay fees on your pension?

Most pension schemes do charge fees, which can impact your retirement savings over the long term so it’s important to take them into account when you’re planning your retirement fund. 

Common charges you might incur include:

• An annual management fee (typically 0.5%–1% of your pot)
• Fund charges for managing specific investments
• Transaction fees for buying or selling specific investment assets
• Inactivity fees (for example, if you stop contributing to your pension)
• Advice fees (via an independent financial adviser or a pension provider)
• Transfer fees are rare and getting rarer in pensions, but they may happen if you move your pension to another provider. 

Pension frequently asked questions

Can you take your pension abroad?

Yes, if you move overseas you should be able to take your pension abroad - either by moving your pension to a pension provider in another country if you haven’t retired yet, or by receiving your pension income and remitting those funds to your country of residence if you’ve retired abroad. 

Keep in mind that tax implications may vary depending on the country you move to, so it might be worth speaking to a financial adviser about your options. 

Can I keep paying into my UK pension if I move abroad?

Yes, it’s often still possible to keep contributing to your private pension in the UK if you’ve moved abroad, but it’s important to note that you might not gain the same level of tax relief as someone living and working in the UK. 

In some cases it might be better to move your private pension to your country of residence, unless you intend to return to the UK to live in the future. 

What happens to your pension when you die?

When you die, the fate of your pension depends on the type of scheme you have:

• Defined Contribution pension: If you have a Defined Contribution pension, the remaining pension pot can be passed on to your beneficiaries. They can choose to take it as a lump sum or continue receiving regular payments. 
• Defined Benefit pension: If you have a Defined Benefit pension, these schemes often provide a “spouse’s pension” or “dependent’s pension”, which would pay those beneficiaries a percentage of your pension income.