The secret to a successful retirement is to build up your pension pot slowly and surely. Exactly how you do that will depend on your situation – but there are lots of things you can do.

Nearly all people who are currently working, or have worked, are likely to have been a member of a pension scheme. This could be via an occupational pension scheme, set up by an employer for their employees, or an individual pension set up by a person on their own.

What is a pension?

A pension is a pot of cash that you, and your employer, can pay into – which, depending on your earnings, you get tax relief on – as a way of saving up for your retirement.

What are the different types of pensions?

There are many different types of pension arrangements available, from state pension schemes offering limited financial support in old age, private pension plans giving you the freedom to build a larger fund for your retirement and occupational pensions where your employer also contributes to your pension pot.

What are the advantages of a pension?

It is a tax-efficient way to put money aside for later in life, to provide income for when you retire. It is best to put in as much as possible, as early as possible.

Depending on the type of pension you have, you and your employer can pay into it.

The government also ‘contributes’ to your pension in the form of tax relief. The amount you receive depends on your income tax bracket – for example as a basic rate tax payer, for every pound you invest in a pension, the Government will pay in a top-up of 20% of the value of the contribution, up to a maximum of the lower of your annual income or £40,000 per year.

How is a pension invested?

Your pension pot is invested in your choice of pension funds, from the selection offered by your chosen pension provider. The idea is that the funds grow over time, maximising the value of the fund so you can get the highest possible income in retirement.

What happens to your pension when you retire?

Once you turn 55 (expected to rise to 57 in 2028) or retire, you have several options for how you choose to take your pension income.

On retirement, usually up to 25% of your pension fund value may be taken as a tax-free cash lump sum. The remainder of the funds left in your pension pot is used to take an income, either by way of an annuity, or by taking cash directly from your pension fund (drawdown).

The income your pension provides you in retirement will vary from provider to provider and will depend on the investment choices you make, the performance of the pension funds, the level of contributions you make and the charges applied.

Note: Each pension company will vary in both charges and investment performance. As with all investment, the value of your investment can go down as well as up.

What is a workplace pension?

Also known as company pensions and occupational pensions, workplace pensions are offered by employers.

Employers in the UK are required to have a pension scheme set up and they must automatically enrol their eligible employees.

  • Defined contribution pensions scheme – You pay in a percentage of your salary and your employer also contributes to it. The income you get in retirement isn’t guaranteed, it depends on how much has been contributed and the performance of the investments.
  • Defined benefit pension scheme – You get a specified amount as income when you reach retirement age. Your pre-determined retirement income is based on how long you’ve worked for your employer and your salary when you retire.

In both instances your employer helps by also making contributions to your pension – meaning you can build up a larger pot than if you were contributing alone. So if you don’t join the scheme, you are effectively turning away extra money from your employer. The downside is that you are restricted to the pension scheme that your employer has chosen.

Occupational pensions don’t have to stop if you leave an employer – you can still contribute to a money purchase scheme after you leave. Although your previous employer’s contributions will stop. Even a pension you are no longer contributing to remains invested and is still subject to charges from the fund and pension provider.

What is a personal pension?

A personal pension, also known as a private pension, is a type of pension you can set up yourself. You can have a personal pension even if you already have a pension through your employer.

There are three main types of personal pension:

  • Simple personal pension – Offer various investment strategies for you to choose from depending on your personal circumstances and attitude to risk
  • Stakeholder pension – There are strict government rules about how these are managed. They have low minimum contribution amounts, few investment options and caps on how much the provider can charge
  • Self-invested personal pension (SIPP) – Often more suitable for large contributions. You control how your money is invested so often better for experienced investors. They may also have higher charges
What is the State Pension?

The state pension is a pension you’ll receive from the government once you reach the state retirement age (currently rising from 65 to 66), provided you have at least ten years’ worth of qualifying national insurance contributions or credits and meet the other eligibility criteria laid out by the government.

The amount you get will depend on the national insurance (NI) contributions you’ve made throughout your working life. The government will then pay you your state pension – a guaranteed income – for the rest of your life.

The basic state pension is taxable, but if you don’t have any other income, you won’t be taxed. You only start to pay tax if you earn more than £12,570 (in the 2022/23 tax year).

What is the “Triple Lock”?

The triple-lock system benefits those receiving the state pension. It determines how much pensioners will receive in state pension income each year. This means every April the state pension amount increases by the highest of:

  • The previous September’s inflation rate (based on the Consumer Prices Index); or
  • The increase in average earnings; or
  • 2.5%

In 2021, the Government decided to suspend the triple lock for the 2022/23 tax year as the increase in average earnings was skewed by the pandemic. Whether or not the triple lock remains in place past 2024 remains to be seen.

The state pension triple lock has proved to be a burden for successive governments, as it has proved costly for the taxpayer.

Overall, around 60% of the Department for Work and Pensions benefit spending went to pensioners, with the State Pension, at £104.7 billion, accounting for almost half of all spending. The cost of the State Pension increased by £2.8 billion from 2020/211.

To discuss any of the issues raised in this article, please contact us. Further information can also be found at

1 DWP State Pension expenditure in 2020/21 £101.9bn and in 2021/22 £104.7bn DWP Annual Report & Accounts (

Personal circumstances differ and not all of this information is applicable to every client and/or their business, this information is general in nature and should not be relied upon without seeking specific professional financial advice.

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Thresholds, percentage rates and tax legislation may change in subsequent finance acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future results.

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