Pensions 101: What, why & how?

Having a pension just means putting some of your money somewhere specific whilst you are working, and then spending that money when you eventually stop working. That ‘somewhere specific’ is in a financial product called a pension, and because the government wants you to have one, they’ll put money into it as well.

The problem is that lots of us aren’t financially prepared for later life. Not only do many of us not really understand what a pension is, we also don’t even know how to save enough for later, and so just aren’t doing the things we need to. So when we’re older, instead of jetting off on a 30-year holiday, we’ll end up just working for even longer.

What is a pension?

A pension is a type of savings account that offers two big benefits: firstly, the government rewards you for choosing to save into a pension by adding 25% of what you save to your pot (or more!), and secondly, because the money you save into a pension is invested on your behalf, it can also grow by around 5-7% per year on average over the long term.

Why do I need one?

You will reach an age when you’ll be less able to work, but you will still need an income. Saving for this stage in your life is more important than ever before, because we are living longer. The state pension isn’t an option for everyone, it may not provide enough income, and you may need money before you reach the state pension age.

How does it work?

Setting up a pension means deciding how much of your earnings to want to start saving into your pension pot. Next, the money you contribute is invested on your behalf, the tax relief you're owed by HMRC is added automatically, & the interest earned over time can create compound returns. When you get to 55+, you can start to use the money to support yourself, and there are a few different ways you can choose to do that.

This is just the tip-of-the-iceberg when it comes to information about pensions, but because our mission is to make saving for the future as simple as possible for the self-employed, we’re starting from the beginning. We don’t expect our customers to be experts!

However, setting up a pension is so important that we want to help people feel confident that they’re informed. We've written a broad set of FAQs about pensions in general. We are trying to avoid jargon as much as possible, but if you find any unfamiliar terms you can refer to the pensions glossary for definitions.

Feel free to get in touch with us if you have any further questions about Penfold pensions, by emailing us at hello@getpenfold.com.

Create an account with us today and start saving for your future.

With pensions, as with all investments, your capital is at risk and the value of your pension with Penfold may go up as well as down. You may get back less than you put in.