For most people, a pension will be one of the most important financial arrangements they ever have. Yet many people reach their 40s and 50s without ever really getting to grips with how their pension works or whether they are saving enough. This guide breaks it down in plain terms.
What is a pension?
A pension is a way of saving money for when you stop working. You build up a pot of money during your working life, and when you retire you can draw on it to provide an income. Pensions are one of the most tax-efficient ways to save, because the government adds tax relief to your contributions, effectively topping up what you put in.
The main types of pension in the UK:
There are three broad categories to know about.
The State Pension is paid by the government once you reach State Pension age, currently 66. The amount you receive depends on your National Insurance record, and you need at least 10 qualifying years to receive anything. The full new State Pension in 2025/26 is £230.25 per week. It provides a useful base but is unlikely to be enough on its own for most people’s retirement.
Workplace pensions are set up by your employer. Under auto-enrolment rules, most employees are now automatically enrolled into a scheme, with both you and your employer contributing each month. There are two main types. Defined contribution schemes build up a pot based on what goes in and how investments perform. Defined benefit schemes, more common in the public sector, pay a guaranteed income based on your salary and years of service.
Personal pensions are set up independently, directly with a pension provider. They are particularly useful for self-employed people or those who want to save more than their workplace pension allows. A Self-Invested Personal Pension (SIPP) is a type of personal pension that gives you greater control over where your money is invested.
How contributions and tax relief work
Every time you contribute to a pension, the government adds tax relief on top. Basic rate taxpayers receive 20% relief, meaning a £100 contribution effectively only costs £80. Higher rate taxpayers can claim additional relief through their tax return. Your employer also contributes to a workplace pension, which adds further to your pot at no extra cost to you.
There is an annual allowance that limits how much you can contribute with tax relief each year. For most people in the 2025/26 tax year this is £60,000, though it can be lower in certain circumstances.
How your pension grows
Your contributions are invested, typically across a mix of assets such as shares, bonds, and property. The aim is for the fund to grow over time so that by retirement you have built up a meaningful pot. Most pension providers offer a range of investment options, and many automatically adjust the mix as you get closer to retirement to reduce risk.
Taking money from your pension
From age 57 (rising from 55 in 2028), you can start accessing your pension. You can usually take up to 25% of your pot as a tax-free lump sum, with the rest used to provide an income, either through drawdown or by purchasing an annuity. The flexibility introduced over the past decade means you have more choice than previous generations did in how you draw your pension down.
Getting the most from your pension
Understanding your pension is the first step. The next is making sure you are contributing enough, that your investments are appropriate for your stage of life, and that you have a clear idea of what retirement might look like financially. A financial adviser can help you pull all of that together into a plan that works for your circumstances.
A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates, and tax legislation. Tax planning is not regulated by the Financial Conduct Authority. Tax treatment depends on individual circumstances and may be subject to change.
Approved by In Partnership FRN 192638 June 2026
