Understanding pensions

The State Pension is a regular payment paid by the government. The age that you start getting the State Pension is rising. You can find out how much State Pension you have built up by calling the Future Pension Centre on 0345 3000 168.

The State Pension only covers your basic needs. Many people also have a private or personal pension. These are either organised by your workplace or by yourself. The more you save into a private pension, the more money you will have when you retire.

There are different types of private pension. If you have a defined contribution scheme, the money you pay in is invested. The amount of money you get when you retire depends on many things, including how much money you and your employer have paid into the scheme. If you have a defined benefit scheme, you will get a tax-free lump sum when you retire and a regular income for the rest of your life. The amount of money you get is based on either your final salary or your average salary during your employment.

State Pension

The State Pension is a regular payment from the UK government that most people get once they reach a certain age. State Pensions are taxable.

The State Pension age is rising. To find out when you will reach State Pension age visit GOV.UK

You can find out how much State Pension you have built up by:

  • visiting GOV.UK
  • calling the UK government’s Future Pension Centre on 0345 3000 168.

The new State Pension

A new State Pension has been introduced for people who reach State Pension age after 6 April 2016.

The aim of this change is to simplify State Pensions. Some people who have not paid enough National Insurance may not be able to get the full amount. For more information, visit GOV.UK

Further support

If you have a low income, you may qualify for extra support alongside your State Pension. This is called Pension Credit. You may also be able to get help towards other costs such as housing.

The rest of this section is about workplace and personal pensions. We have more information about the State Pension and other benefits you may be able to get from the government.


Private pensions

Private or personal pensions can either be:

  • arranged by your employer – these are called workplace pensions
  • arranged by you – you will need a financial adviser to do this.

Most workplace pensions are worth joining, because your employer will pay into it alongside the money that you pay in. The money comes from your salary before any tax is taken from it (pre-tax). This makes pensions a tax-efficient way to save.

A new scheme called auto-enrolment means employers will need to arrange workplace pensions for most of their workers. This scheme is being introduced gradually between now and April 2019. Workers can choose to opt out of auto-enrolment. If you have a personal pension somewhere else, you might want to opt out.

Types of private pensions

There are two types of private pension scheme:

  • Any pension you arrange yourself will be a defined contribution scheme.
  • Workplace pensions can either be a defined contribution or defined benefit scheme.

Defined contribution schemes

Defined contribution pensions build up a pot of money paid by either:

  • you
  • you and your employer, if you have one.

The money is invested, for example in stocks and shares. This investment hopefully increases its value over time. All personal pensions, and many workplace pensions, are defined contribution schemes.

Since April 2015, savers have been able to access defined contribution schemes in a variety of ways once they are 55 years old.

The amount of money you get when you claim your defined contribution pension depends on:

  • how much money you have paid into the pension
  • how much money your employer, if you have one, has paid into the pension
  • how much the pension fund has grown while being invested
  • your choices about how you access the money.

Defined benefit schemes

If you have a defined benefit scheme, your employer promises to pay a pre-agreed amount when you retire. The amount you get is based on either:

  • your final salary
  • your average salary from across your time at the workplace.

These are also called final salary or career average schemes.

You may have a defined benefit scheme if you have worked for a large organisation or in the public sector for a long time. They are generally a good option but are now rarely offered to new workers.

If you have a defined benefit scheme, you will get a tax-free lump sum when you retire and a regular income for life. These schemes usually have a retirement age of 65. You will normally get a pension based on:

  • the number of years you have been a member of the scheme
  • your final or average salary
  • the scheme’s ‘accrual rate’ – this is a formula used to work out the final amount you will get.


Do I need a private pension?

You may want to stop paying into a pension, or not start one, to save money. It is important to think carefully about this decision.

The State Pension usually only covers your basic needs. From April 2016–April 2017, the full State Pension pays £155.65 a week for a single person. Not everyone approaching retirement will get this amount. The more you save into a private pension, the more money you will have to live on when you retire.

Since April 2015, some types of pension are more flexible. You may be able to take some of your savings early as a lump sum, to help you cope with unexpected expenses or some time off work.

Reasons to start a private pension

  • The State Pension may not give you enough money to live on when you retire.
  • People are living longer and need to save more money.
  • Your employer will normally pay money into a workplace pension, meaning you will save more.
  • You usually get tax relief on pension contributions. This means that some of the tax you would normally pay to the government is paid into your pension scheme instead.
  • You will be able to get a tax-free lump sum when you retire.
  • You may be able to take out other, partly tax-free lump sums before you retire.
  • You may be able to pass your pension on to your loved ones when you die.

Back to Pensions

Accessing your pension

There are different ways of accessing your pension. This depends on your pension type and your illness.