Pensions

a beginner's guide to saving for retirement

What is a pension?

A pension is the money you use to live on when you retire. People have different ways of supporting themselves financially in their retirement (using inheritance money, for example) but a common way is to save money over a long period of time. You could do this simply by putting some money into a savings account each month but with the tax relief you get, a pension plan could be a good option. Your pension pot cannot be accessed before you reach the age of 55, so there’s no temptation to dip into it beforehand!

Personal pension

A personal pension builds up a retirement savings pot, the value depends on how much youʼve paid in over the years and how your investments have performed.

Your payments are invested in funds, which are put into assets such as stocks and shares and are usually spread across different investments to help increase the chance for growth.

Your provider will claim the tax relief on your payments and add them to your pot. This may be a good option to explore if youʼre not paying into a workplace pension.

State Pension

The state pension is a regular income that you can claim from the government based on the amount of National Insurance paid over the course of your working life. 

The full state pension is currently £159.55 a week (just over £8,000 a year). The age at which you can start claiming depends on when you were born. Youʼll need to decide if this is going to be enough for you to live on.

You can find out when youʼll be able to take your pension at www.gov.uk.

Workplace pension

From 2012, it became the law for all employers to automatically enrol their eligible workers into a workplace pension either through their own scheme, a private pension provider or via a government backed initiative.

Workplace pension schemes require a contribution from your employer (on top of the amount you may pay in) and benefit from tax relief. Due to Automatic Enrolment, you may already be paying into a workplace pension, so itʼs worth checking what you currently have before starting a pension.

Take a look at our Workplace pension page for more information.


Why save into a pension?

When you pay money into a pension, you get tax relief. A basic-rate taxpayer gets 20% tax relief on their pension payments, a higher rate payer 40%, and an additional rate payer 45%. So, as a basic-rate taxpayer, for every £80 you pay into a pension, you get an extra £20 from the government, which means £100 is actually being invested for your retirement. If you are a higher or additional rate tax payer, you may be able to claim back more tax relief through your tax return. There are however, limits to the amount you can pay in (especially when it comes to higher and additional rate taxpayers) so it's well worth taking a look at our guide to pension tax for more information.

Your pension fund grows largely tax-free, which can help to boost the amount you have in your pension plan. Remember that, depending on investment performance, the value of your fund can also go down which affects how much you've got in your pension plan and the amount of income you'll have when you retire.

You can currently take up to 25% of your pension savings as a tax free sum. What you do with it is entirely up to you – except for one thing: you can’t put it into another pension plan. Otherwise, you’re free to spend it – or save it – anyway you please.

That leaves 75% or more in your plan which is taxable when you take it, but taking the tax-free sum will reduce the amount available to provide an income in retirement.

Man with a coffee using a laptop

How it works

John, a basic rate taxpayer wants to save £50 a month in his pension plan.

The good news for John is he will only have to pay £40 as HM Revenue & Customs (HMRC) will give an additional £10 (basic rate tax relief).

For more information about claiming tax relief, see our guide to pension tax.


Timeline to retirement

It’s never too late to save for retirement. However, you should understand that both the amount you save and the way you invest changes as you get older; assuming you want the same standard of living after you retire.

More than 10 years

You’ve got a lot of time and there's no need to live off beans on toast while you squirrel away every penny. At the same time though, plan now and you could reap the rewards.

You have a better chance of turning smaller payments into a good pension if you get cracking. Your retirement savings will also be better placed to weather the ups and downs of investing if you begin now.

Always remember your investments could fall in value which will impact how much pension you will receive.

Play Picture This to find out if you’re currently saving enough.

5-10 years

There's no panic, but if you've not started saving it might be time to get your skates on. To start a pension plan, take a look at our Retirement account page.

Already saving? It's the perfect opportunity to give your retirement a boost by paying in a little more. You'll get tax-relief on your payments so put that Christmas bonus to work.

Thinking you might work until 80 or already shopping around for that sporty little number? If you change your retirement age, you should change your planning too.

If you’ve moved from job to job, you may have picked up a few different pension pots on your travels. Why not see if we can help you tidy things up and bring them together in one place? 

Less than 5 years

Just like learning French or finishing that novel, you can't put things off forever. It's time to start thinking about how you want to take your retirement savings. 

Take stock of your options and check how much you've saved up until this point. When you know what your plans are, think about investing in funds that closely match the way you want to take your retirement savings. Don't forget to factor in your state pension too. 

Have a look at our My Retirement page for more details. 

You can also track down any lost pensions through www.gov.uk. Please note we're not responsible for the content of other websites.

Ready to start saving?

If you’d like to start saving for your retirement, have a look at our retirement account page to see how we can help.


Retirement account

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Dreaming about the perfect retirement is one thing, making it happen is another. Find out if you’re saving enough for a future you’ll love by playing Picture This.


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