Saving into a pension is one of the most tax-efficient ways to put money aside for the future.

But pensions can feel confusing – especially when you’re trying to understand things like tax relief, contribution limits, withdrawal rules, and how much you actually need to save.

This guide explains everything in plain English.

What is a pension?

A pension is a long-term savings plan designed to help you build up money for retirement.

You contribute money while you’re working, and that money is then invested so it can grow over time.

The key benefit is that pensions come with generous government incentives – mainly through tax relief, which boosts the amount you save.

In simple terms: pensions help you save more efficiently than most other investments.

How do pensions work?

Most pensions work like this:

• You pay money in (monthly or as a lump sum)
• The government adds tax relief
• Your pension provider invests the money
• The pot grows over time
• You can access it later in life (usually from your late 50s)

Pensions are designed to stay invested for decades, which gives them time to benefit from long-term compound growth.

Why do I need a pension?

Most people will need more than the State Pension alone.

The UK State Pension provides a base income in retirement, but it’s rarely enough for most people to live comfortably on by itself.

That’s why pensions are so important – they allow you to build your own additional retirement income while benefiting from government support.

What types of pensions are there?

There are several main types of pension in the UK:

Workplace pensions

Set up by your employer through auto-enrolment. Contributions usually come from:

• You
• Your employer
• The government (tax relief)

Personal pensions

Pensions you set up yourself, often used by:

• Self-employed people
• Contractors
• Anyone without a workplace scheme

SIPPs (Self-Invested Personal Pensions)

A type of personal pension that gives you more control and flexibility over how your money is invested. Penfold operates a modern SIPP designed to be simple, easy to manage, and fully online.

Pensions if you’re self-employed

If you’re employed, you’ll usually receive pension contributions from your employer through a workplace scheme.

But if you’re self-employed, you won’t get employer contributions – meaning it’s up to you to set up and fund your own pension. The good news is:

• You still receive tax relief from the government
• You can open a personal pension or SIPP in minutes
• Even small contributions can add up over time

A pension is one of the most effective ways for freelancers and business owners to save for retirement.

What are the benefits of a pension?

Pensions come with powerful advantages:

• Tax relief (government top-ups): When you contribute, the government usually adds money too.
• Long-term investment growth: Your pension is invested, giving it the chance to grow over decades.
• Employer contributions (workplace pensions): If you’re employed, your employer usually has to contribute as well.
• Retirement flexibility: From later life, you can access your pension in a range of ways.

Pension tax relief explained

Pension tax relief means the government boosts your contributions.

Basic rate taxpayers

For every £80 you contribute, the government adds £20.

So £80 becomes £100 in your pension.

That’s why basic-rate tax relief is often described as a 25% top-up.

Higher and additional rate taxpayers

Higher-rate taxpayers can often claim extra relief through their tax return.

Penfold automatically claims the basic rate, and you may be able to claim more depending on your circumstances.

Tax rules can change, and higher-rate relief depends on your income and how you contribute.

How much should I contribute to my pension?

A common rule of thumb is:

Contribute a percentage of your income equal to half your age when you start saving.

So if you start at 30, you might aim for around 15% of income (including employer contributions).

• But the right amount depends on:
• Your retirement goals
• When you want to stop working
• Your lifestyle expectations
• Other savings or assets

The most important thing is simply to start – even small contributions make a difference.

Is it too late to start a pension?

Many people put off saving because retirement feels far away. But starting sooner makes a huge difference, thanks to long-term investment growth.

Even a small pension started in your 20s or 30s may grow significantly more than a larger pension started later.

The key message is simple: The earlier you start, the less you may need to contribute overall – but it’s never too late to begin.

What if I can’t afford to save much right now?

That’s completely normal. The good news is:

• Saving something is better than saving nothing
• Pension contributions are boosted by tax relief
• You can increase contributions over time

Even £20 a month can grow significantly over decades.

Do pensions perform badly?

You may hear people say pensions are “bad investments”. But it’s important to understand:

A pension isn’t an investment itself — it’s a tax-efficient wrapper.

The performance of your pension depends on the investments held inside it (for example, global funds or bonds).

All investing involves risk, but pensions are designed for long-term saving, which can help smooth out short-term market ups and downs.

Is there a limit to how much I can pay into a pension?

Yes – there are limits on how much tax relief you can receive.

Annual allowance

Most people can contribute up to £60,000 per year (or 100% of earnings, whichever is lower) and still receive tax relief.

Higher earners may be subject to a reduced allowance.

If you’re unsure, it’s worth speaking to an accountant or financial adviser.

Can I withdraw my pension early?

Pensions are designed for later life.

In most cases, you can access your pension from:

• Age 55 currently
• Rising to age 57 from 2028

Withdrawing earlier is usually only possible in exceptional circumstances.

What happens when you retire?

When you reach pension access age, you’ll have several options:

• Take up to 25% tax-free
• Leave the rest invested
• Draw an income gradually
• Buy an annuity
• Take lump sums as needed

Most people use a combination. What’s right depends on your retirement plan, tax position, and long-term needs.

Will I pay tax when I withdraw my pension?

Yes, usually:

• 25% can be taken tax-free
• The remaining 75% is taxed as income when withdrawn

Your personal tax rate depends on your total income in retirement.

Are pensions safe? Could I lose money?

Pensions are generally very secure structures, but the value of investments can rise or fall.

With Penfold:

• Your pension is held separately from Penfold’s own finances
• Investments are managed by regulated providers
• FSCS protection may apply in certain circumstances

As with all investing:

Your capital is at risk, and you may get back less than you put in.

Should I combine old pensions?

Many people have multiple pension pots from previous jobs. Consolidating can make it easier to:

• Track everything in one place
• Reduce admin
• Potentially lower fees

Penfold can help you find and combine old pensions into one simple account.

What happens to my pension if I die?

A pension is usually one of the most inheritance-friendly ways to pass on money. If you die before taking your pension, the money can typically be passed to:

• A spouse or partner
• Children or dependants
• Anyone you nominate as a beneficiary

This is why it’s important to keep your beneficiary nomination up to date.

Ready to start saving into a pension?

A pension is one of the most effective ways to invest in your future – thanks to tax relief, long-term growth, and (for employees) employer contributions.

👉 Now you’ve got the basics, here’s everything you need to know about the Penfold pension.

👉 Or create an account in minutes and start saving today.

With pensions, as with all investments, your capital is at risk and the value of your pension may go up or down. You may get back less than you put in. Tax rules depend on individual circumstances and may change in future.