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What is a pension?

For many, the world of pensions can be confusing - full of complex jargon, too much choice and unclear benefits. In this guide, we'll cover what a pension actually is, look at the different types available, and briefly talk about why a pension might be right for you.

What is a pension?

Put simply, a pension is a tax-efficient way to save for life after work.

Think of it like a savings pot built for your retirement. Over your career, you can add to this savings pot by contributing from your income, whether that's a salary from your employer or profits from your business. Little by little, your pot grows until you're ready to stop working.

You can withdraw your pension from age 55 (rising to 57 in 2028) and use it as an income in retirement. You can also access the money in your pension in a number of ways.

The government encourages people to plan for their futures by offering tax relief on pension contributions, making your money work more efficiently. This means by contributing into your pension, you end up paying less tax, keeping more of your hard-earned money.

what is a pension

Types of pension

There are three main types of pension.

  • Private pensions
  • Workplace pensions
  • The State pension

Private pension

A private (or personal) pension is a pension you open and manage yourself. You choose how much you pay in and when - and you also have more of a say of how your pension is invested. It's the kind of pension we offer at Penfold.

More about private pensions

Workplace pension

A workplace (or employer) pension is a pension set up by your employer on your behalf. You can contribute into your pot each month from your pre-tax salary. Your employer will also add a minimum of 3% of your salary into your chosen scheme, although this is subject to limits.

State pension

The State pension is a regular payment from the government, offered when you reach State retirement age (currently 66, rising to 67 between 2026 and 2028). It's important to know that for many, the State pension won't be enough to support you on its own.

More about the State pension

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Why pay into a pension?

The main benefit of a pension is tax relief. Every time you contribute, the government will automatically top up your pot with a 25% bonus.

Higher rate taxpayers can also claim an extra 20% back via their tax return, while additional rate taxpayers can enjoy an extra 25% back. Check out our article on pension tax relief for more on how this all works.

For workplace pensions, you can also take advantage of salary sacrifice. That's where your pension contributions come out of your pre-tax salary, reducing your monthly income, meaning you'll have to pay less National Insurance tax. Another fantastic way your pension can help you keep more of what you earn.

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