

Pension need-to-knows
Key points for retirement saving
Fancy an easy pay rise? Start a pension and you could get one. Not only will the Government top up your pension pot, but if you're employed, your employer may also HAVE to help.
This guide doesn't apply to final salary schemes. Here your wage and length of company service determine your retirement income – for basic info go to the different pension types section. Nor does it cover the humble state pension – always check if you can boost it.
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What is a pension plan?
A pension plan is fundamentally a simple product:
It is just a pot of cash that you, and your employer, can pay into – and which you get tax relief on – as a way of saving up for your retirement.
Then, at retirement, you can draw money from your pension pot or exchange the cash with an insurance company for a regular income until death, called an annuity.
Since 2015, from the age of 55, you've been able to access your pension plan more flexibly, taking as much or as little cash as you like, whenever you like. It's worth noting the Government's said this will rise to age 57 in 2028, so could have an impact on your pension planning.
But it's important to understand how saving for a pension affects your income. Essentially you're giving up disposable income now in exchange for a future pay rise (in the form of pension income). As you'll be getting less in your pay packet, consider this carefully when budgeting. See our free Budget Planner tool.
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Is a pension REALLY worth it?
A key benefit of a pension plan is the tax relief, which comes in two forms depending on whether you're a basic-rate or higher-rate taxpayer.
You get some tax back on the money you put into a pension, while gains from the investments you make with that cash are largely tax-free.
You get the tax back you've paid on all contributions, if you're under 75, subject to an annual allowance.
Are you self-employed? Data shows a record five million people are now self-employed, yet saving for a pension among this group is also at a record low. Don't ignore saving into a pension if you're self-employed. Read on for how much you should be saving and how to get a cheap pension.
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How much should I put in a pension?
With auto-enrolment workplace pensions, there are minimum contribution levels. But if you can afford it, you really should be contributing more.
Before starting, it's worth noting those in debt, especially at high rates of interest, should consider whether it'd be better to get rid of that before starting a pension. Plus, a pension's only one form of retirement planning. Combining it with other methods is often a good plan.
The basic advice with pensions is to put in is as much as possible, as early as possible. There's a rule of thumb for what to contribute for a comfortable retirement...
Take the age you start your pension and halve it. Then put this % of your pre-tax salary into your pension each year until you retire.
So someone starting aged 32 should contribute 16% of their salary for the rest of their working life. While 16% of your pay may seem a huge commitment, this figure includes your employer's contribution – so you only need to fund the rest.
Some additional points follow from this rule of thumb:
For a more accurate way of calculating how much you need to retire, try using the Money Advice Service's pension calculator. It'll ask for information including when you want to retire, how much you and your employer are contributing, and whether you want your pension to be inflation-proof.
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How much can I put in a pension?
There's technically no limit as to how much you can put in a pension – but there are limits on how much tax relief you'll get for doing so. There are three different limits to be aware of:
Importantly, money paid by someone else, such as your employer, counts towards those allowances. You can still save more into a pension but you will only get the tax breaks up to the stated maximums above.
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What's auto-enrolment?
Pensions for employees are nothing new – they have been a common staff perk, particularly for people working for big employers, for many years. However, not all employers have offered pensions.
Auto-enrolment now requires ALL employers to offer employees a pension, to automatically enrol you in the scheme and, crucially, to contribute on your behalf.
From 6 April 2019, the minimum employer contribution level increased to 3%. Under auto-enrolment, total contributions must be at least 8%, so if the employer only puts in 3%, the employee has to contribute 5%. See Martin's 'You're likely about to get a pay rise, but it may cost you' blog.
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What's 'salary sacrifice'?
Paying into a pension gets all taxpayers a tax break. But for an extra and easy bonus, salary sacrifice is worth considering.
Salary sacrifice applies to a number of workplace benefits such as childcare vouchers or cycle-to-work schemes, not just pensions.
It's where you give up some of your monthly earnings and your employer puts it towards something else – in this case, pension contributions.
As it comes out of your PRE-TAX salary and straight into your pension, you pay less national insurance (NI). Your employer will also pay less employer's NI which gives them incentive to operate the scheme.
One thing to take into consideration with salary sacrifice is that, as the name suggests, you are deemed to have a salary. This can have knock-on effects: it could reduce your earnings so that you'd no longer qualify for statutory maternity pay, for example.
In 2022/23, if your salary sacrifice takes your salary below £123 a week, £533 a month or £6,396 a year, you'll be affected. If that's you – think twice before sacrificing. And the amount you sacrifice cannot take your salary below the minimum wage.
It could also affect mortgage applications and other benefits, such as jobseeker's allowance and employment and support allowance.
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Should I take my employer's pension?
If you're employed (aged 22-plus and earning at least £10,000 a year), you'll be auto-enrolled into a pension to which your employer must contribute at least 3% of your salary (within certain limits).
This is effectively a pay rise, so beware of giving it up, plus there's no tax to pay on pension contributions (subject to annual allowances, above). It may not be going into your pay packet, but it is cash going towards your future.
Of course, you may not have the cash to afford the employee contributions, and there's no point getting into costly debt if that's the case. See our free Budget Planner tool to help you decide.
Another key consideration is whether your existing pension pot already has individual, fixed, enhanced or primary protection. This is where you will have fixed your lifetime pension allowance at a previously higher level (for anyone without protection the lifetime allowance is £1,073,100 in 2021/22). If you have fixed or enhanced protection you will lose it if you take your employer's pension, so weigh up the benefits.
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Should I 'consolidate' my pensions?
Pension consolidation means combining all (or some) of your pensions into one pot. The advantages are that you can save on fees, reduce admin and paperwork, and easily see all your funds in one place to ensure you’re on track for retirement.
Plus, some pre-2015 pension schemes aren’t as flexible to access as newer pensions, so by transferring into a post-2015 pension scheme, you may give yourself more options on accessing your money at retirement.
But beware, for some, there can be serious downsides to consolidation. If you have a final salary or defined benefit pension, you could be sacrificing valuable benefits by transferring to a defined contribution pension scheme, such as guaranteed annuities, or the age at which you can start taking out your pension.
There may also be hefty early exit charges to transfer to a different provider. So before you do anything, seek financial advice.
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Aren't pensions a load of rubbish?
Ignore the criticisms you may have heard about pensions. Many stem from a fundamental misunderstanding of what a pension plan is. It's simply a tax-sheltered wrapper to save money for retirement. Pensions' bad rap mainly comes from investments that don't pay off or high charges (see Martin's blog: The one word that caused the pension crisis).
A pension plan is a tax-efficient savings option that isn't implicitly risky. The risk comes from the investment choice.
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The different types of pension
Pensions come in all shapes and sizes. The first distinction is whether the pension is a final salary or a money purchase pension.
Final salary
These pensions, also called defined benefit schemes, or in some cases Career Average Revalued Earnings (CARE) schemes, are largely funded by employers, though staff may also have to pay into them. With these, you get a percentage of your final pre-retirement salary, or when leaving that firm, as an annual income.
Money purchase pensions
With money purchase pensions, also known as defined contribution schemes, the money you put into your pension plan is invested and what you have at retirement depends on how those investments have performed.
Pension plans can also be categorised as:
Quick question
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Who's holding my money?
With most workplace pensions, your employer chooses a third-party pension company, such as Aviva, but you can still decide the type of risks you want to take with them.
Typically you'll do this by choosing, and being able to switch, investment funds.
If you start your own pension, you choose the manager. If you opt for a SIPP, it will also be managed by another firm but you make the investment decisions (see our Cheapest SIPPs guide).
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How do I get a pension?
Under the new rules, many people will end up in a company pension through auto-enrolment, so all they need to do is go ahead with what their employer offers. To get any contributions your employer offers, you'll normally need to be part of its scheme.
If you choose your own pension then you'll need to scour the market for the most suitable plan.
Unless you're financially savvy, it's usually best to get advice from an independent financial adviser (IFA), given the whole host of pension charges to watch out for. Since January 2013, IFAs can no longer be paid in commission, so you'll have to pay a fee for advice.
See our Financial advisers guide for how to pick an IFA, including what getting advice will cost you.
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How do I get a cheap pension?
If you don't get a workplace pension, it's time to do your homework.
If you have the financial savvy to know what you want to invest in, you can head straight to the pension company and set that up. Take a look at our SIPPS guide for more information.
Be aware that this may not necessarily be the cheapest option as group plans (such as with your employer) can be cheaper.
There are a number of specialist pension discount brokers. Here, you just tell them the pension you want and they arrange it without giving you advice. This means they rebate some or all of the charges back into your fund, effectively reducing the charges compared to going direct.
Even though we're only talking about fractions of a percentage point, the compounding effect means your fund could be £1,000s better off over the long term.Using this route means you get no advice, which may not be a problem. But if you're confused, unsure, or have complex circumstances, it's best to be safe and see an IFA. It's better to pay a few hundred pounds upfront so you don't end up losing thousands over your lifetime, if you've no idea what to do. Unbiased.co.uk* and VouchedFor list local advisers. If you're over 50, you can also book a free 45-minute appointment with Pension Wise, who can offer free, impartial guidance on your retirement options.
Important! Even if you pay a low set-up fee and/or get some charges rebated, you may still pay what's called an annual management fee charged by the fund manager that looks after your investments, so there are additional costs to consider.
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Do-it-yourself SIPP platforms to consider
If you decide to go down the DIY route, you won't have to pay a set-up fee but there will be other ongoing charges. And, crucially, because SIPPs are investments, your capital is at risk, meaning the value of your pension can go down as well as up.
Investing isn't MoneySavingExpert's area of expertise, so we can't tell you which SIPP platform is best for you. But as well as going into much more detail about how these DIY pensions work, our SIPPs guide does list some of the cheaper providers that you may want to consider. These are:
- Vanguard
- AJ Bell*
- Hargreaves Lansdown*
- Fidelity*
- Interactive Investor*
- Evestor*
- Nutmeg*
- Wealthify*Note: The firms mentioned above all offer decent deals, though it may be possible to beat them – it's not a definitive list. Read our SIPPs guide for more info. Or if you want to pay for professional financial advice, check out our guide on choosing financial advisers.
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What happens when I retire?
Once the money is in a pension, it can't be withdrawn willy-nilly. It must stay there until you're at least 55 (unless any extenuating circumstances apply). At that point, you can take 25% of it as a tax-free lump sum, with the rest ideally providing an income for the rest of your life...
If you get approached before you're 55, it's a scam known as pension liberation or unlocking. These scams are so damaging the Government banned cold calling about pensions in January 2019. Firms ignoring this could be fined £500,000.
For full details of how to release money from your pension legitimately and how to avoid scams, read our Pension liberation guide.
When your regular work income stops... it's decision time. Ideally, start preparing a few years beforehand.
Provided you're over 55, you'll be able to take as much of your pension pot as you like, when you like – though drawdowns above the tax-free 25% will be taxed at your marginal rate – so 20% if you're a basic-rate taxpayer, 40% or 45% if you're a higher or additional-rate payer, or the amount you've taken from your pension pushes you into that rate.
In September 2020, the Government announced that it was planning to raise the earliest age you could access your pension from 55 to 57 in 2028, so this may affect how you plan for your retirement.
Accessing your pension for the first time?
From 1 June 2022, if you're accessing your pension for the first time, your pension provider must tell you about the Pension Wise guidance service, which offers a free 45-minute session to talk through your retirement options. Your pension provider will also have to offer to book the Pension Wise appointment for you, or give you enough information for you to book it yourself, as well as explain what Pension Wise do and the reason for having the appointment.
If you choose not to have an appointment with Pension Wise – which can be in person or over the phone – your pension provider will need to record the fact that you declined the service. Your pension provider must offer to make the appointment for you BEFORE you complete the application to access your pension.
Given Pension Wise is a free service, you've got nothing to lose by speaking to them, even if you've used the service before. It could prevent you from making a bad financial decision when taking your pension for the first time.
The new rules relate to all personal and stakeholder pension providers, including SIPPs and defined contribution (DC) schemes. The rules are also in place if you're considering transferring your pension to another provider.
Also make sure you're aware of the how you might be taxed when accessing your pension for the first time. Check out our guide on reclaiming pension tax if you end up paying too much.
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You can do anything you like with your cash (you don't have to buy an annuity)
You can still use your retirement cash to buy an annuity if you want to, but you no longer have to. The pension freedoms that were introduced in 2015 mean that anyone who's aged 55 or over (57 or over from 2028 onwards) can take their pension money however they want, whenever they want – there's now complete freedom.
For most people, accessing pension cash at 55 will be too early, so it can just be left where it is. But if you want to, you can access all your pension cash at once – the first 25% is tax-free and the remaining 75% will be taxed as income.
Video explainer: Martin Lewis has warned pension savers they could lose £1,000s, or even £10,000s, from their pension by falling foul of a trap that sees withdrawals taxed. For more, watch Martin's video, courtesy of ITV's The Martin Lewis Money Show.
You can turn on subtitles by using the closed captions icon at the bottom of the video.
Martin Lewis explains how taking money out of your pension early could cost you thousands in taxEmbedded YouTube VideoAssuming you've not taken all your pension out, the remaining options are:
There are different charges on all of these, and it's important to check them out and always compare different providers. For more on all this see Martin's pension freedom briefing, or for the full lowdown read our guide to taking your pension.
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What happens to my pension when I die?
While it's not fun to think about, there are several important things you need to know about passing on your pension when you die.
The rules differ depending on your age when you pass away, whether you'd started taking your pension or not, and what type of pension you have:
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What happens to my pension if I get divorced?
New divorce laws (the Divorce, Dissolution and Separation Act 2020) came into force in April 2022. While this will potentially simplify and speed up the divorce process, it's important to ensure your pensions don't get overlooked. This is especially true if one person in the relationship has a lot less in their pension pot – as is often the case if they've stayed at home to raise a family, for example.
There are generally three ways pensions can be distributed as part of a divorce settlement:
- A pension sharing order is a formal court order. It transfers some/all of the money from one spouse's pension into a pension in the other spouse's name, as if they'd actually paid into the fund themselves. They can then draw down according to the rules of the scheme.
- A pension attachment order (known as 'earmarking' in Scotland), is where one spouse pays a share of their pension income to the other spouse. But the other spouse only starts receiving it when their former spouse starts taking their pension.
- Pensions offsetting is where pension wealth is taken into account during the settlement, but one spouse agrees to accept a greater share of non-pension assets – for example, a bigger share of a house – in return for forgoing a share of the pension. This process does not require a court order.
Dividing pension assets is complicated, so consider getting legal advice before making any decisions. If you're going through a divorce, you can also get free pensions advice from the Government's MoneyHelper service.
- A pension sharing order is a formal court order. It transfers some/all of the money from one spouse's pension into a pension in the other spouse's name, as if they'd actually paid into the fund themselves. They can then draw down according to the rules of the scheme.
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How safe is my pension?
With savings accounts, the simple rule is that up to £85,000 per person per institution is fully protected should your bank go bust. This protection's provided by the UK's Financial Services Compensation Scheme (FSCS, see the Savings safety guide).
This £85,000 limit has been extended to pensions and investments from 1 April 2019. Previously the FSCS limit was just £50,000, except for annuities – where cover was and remains unlimited.
FSCS protection for pensions can seem very complex. This is just a general guide, always check with your provider.
The FSCS does not generally cover performance losses, for example, if the shares you invest in were to go bust, though it can cover poor investment management.
The FSCS safety does apply if you lose money due to the pension or investment firm going bust. Usually with pensions, if you buy through a broker it doesn't hold any of the cash, it simply acts as a conduit for you to put the money into whatever funds or investments you want. Therefore in the unlikely event the broker goes bust, your money should be OK, and still held by the fund manager or bank it resides with. The £85,000 protection applies should any of those go bust.
If protection kicks in, the FSCS will first try to transfer your funds from the failed company to another company.
For failed IFAs or brokers that mis-sold or provided dodgy pension advice, there may be a claim against the firm for mis-selling via the FSCS. This would be up to the investment limit of £85,000.
If you've got a defined benefit (final salary) pension, there's a risk of your employer going bust, leaving you with no pension income. In this case, the Pension Protection Fund (PPF) is available and may pay compensation.
Quick question
FSCS protection for pensions is very complex, and can vary with each product's structure. This is just a general guide, always check with your provider.
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Can I also save into a Lifetime ISA?
If you're under the age of 40, you can take out a Lifetime ISA to save for your first home or your later years, with the Government adding 25% as a bonus – that’s £1 for every £4 you save.
The Lifetime ISA isn't meant to supplant pension saving – there's much to be said for having a Lifetime ISA and contributing to a workplace pension.
Quick question
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