What is a pension?
First published 12 October 2017 • Updated 01 March 2018
Pensions provide income in later life, usually for when you’ve retired from work. You pay into your pension pot throughout your working life, and you can start drawing it once you reach a certain age (depending on the type of pension).
How do pensions work?
There are two main types of pension, and these work in very different ways.
Defined contribution (or money purchase) pensions are pots of money that you save over time by making regular contributions. Your pot is invested in a fund of investments in the hope that it will grow until you need to draw upon it, which you can do from the age of 55 onwards. Most workplace pensions and all personal pensions are defined contribution schemes.
Defined benefit (or final salary) pensions are a type of workplace pension scheme. The scheme arranges to pay you a regular, guaranteed income for life once you reach a certain age (set by the scheme). Many public sector pensions and some private sector workplace pensions are defined benefit schemes.
Workplace pensions, personal pensions and the State Pension
Every employer must offer their employees a pension plan. Both you and your employer contribute to the scheme, and the government gives you tax relief on your contributions. You can opt out of a workplace pension scheme voluntarily, but no-one can pressure you into doing this. Find out more about workplace pensions.
You can also take out a personal pension scheme yourself – for example if you’re self-employed. There are two main types of personal pension: a stakeholder pension and a self-invested personal pension plan. You receive tax relief on your contributions. Find out more about personal pensions.
The State Pension
If you have paid sufficient National Insurance contributions, you will also receive a State Pension when you reach a certain age. The amount may vary, and the current maximum is £159.55 per week. So although this is a useful top up to your retirement income, you shouldn’t rely on it alone. The State Pension age may also rise over time, meaning you have to wait longer before receiving yours.
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