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Pension need-to-knows

Key points for retirement saving

Clare Casalis
Clare Casalis | Edited by Ben Slater
Updated 20 September 2023

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. 

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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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  1. A pension plan is a tax-friendly way of saving for your retirement

    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. This will rise to age 57 from 6 April 2028, so bear this in mind when considering 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.

  2. Tax relief means for every £80 you pay in, the state pays in £20 (and it pays in more if you pay more tax)

    This is a big benefit of saving in to a pension.

    If you pay money into a pension yourself, or if it is taken by your employer from your pay packet and paid in, you automatically get 20% tax back from the Government as an additional deposit into your pension pot.

    And if you're a higher-rate taxpayer you can claim an additional 20%, while top-rate taxpayers can claim an additional 25% (For more information on how to reclaim tax, see HM Revenue & Customs' webpage).

    If you are part of a workplace pension, you may not need to reclaim any tax if your employer simply deducts less tax from your pay packet.

    How does the tax relief work?

    Getting 20% tax relief doesn't mean you get 20% back of what you contribute. Instead, the 20% is calculated on your pre-tax earnings.

    So when a basic 20% rate taxpayer invests £80 of their take-home pay in a pension, they'd have actually earned £100 before tax. The tax relief is 20% of the £100 – in other words, £20. Here's how it works for the other tax brackets (and it works the same in Scotland, though the brackets and tax rates are different):

    For how much you could get in to a pension after all contributions and tax relief, use our quick calculator...

  3. How much should I put in a pension?

    With auto-enrolment workplace pensions, there is an 8% minimum contribution level (your and your employer's combined contributions should reach this). But if you can afford it, you really should be contributing more.

    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 a pension and halve it. Then aim to 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. Don't worry, almost nobody reaches this amount, but the real takeaway is start as early as possible with whatever you can, as you've longer for the gains to compound. 

    Use pay rises to increase your contributions

    There are a couple of tricks here if your pay increases...

    • Make sure you put at least the same proportion away. If you've asked your employer to take a proportion of your salary, then your pension contributions will increase as your pay does. But if you're saving a monetary amount each month, say £100, make sure you increase it every time you get a pay rise so it's the same proportion of your salary.
    • Increase contributions if you can. Most people are unable to contribute enough at the beginning for the 'half your age' rule. So start with whatever you can, but each time you get a pay rise, put a quarter of the extra monthly cash into your pension. 

    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.

    A note for those with debts: If you have debts, especially at high rates of interest, consider whether it'd be better to get rid of that before starting a pension. Or you could split cash between paying off the debt and the pension, which means you're not delaying starting. 

  4. How much can I put in a pension?

    There are strict limits on how much you can put in your pension and get tax relief on (technically, you can put more in, but without tax relief there's no point as it defeats the benefit of a pension). There are three limits you need to be aware of:

    1) An annual limit. The tax relief you get depends on what you earn each year:

    • Earnings of £3,600 or less. Here you can put £2,880 in to a pension each year and it'll be made up to £3,600 with tax relief.

    • Non-taxpaying earners (those earning between £3,601 and £12,570). Here you can put 100% of your earnings into a pension each year, and it'll be eligible for a 20% tax relief top up – provided your provider pension scheme is ‘relief at source’.

    • Taxpaying earners (earning £260,000 or less). Here you can either put 100% of your earnings or £60,000 (whichever's lower) into your pension pot and still get tax relief on the lot.

    • Earning over £260,000. Your annual limit lowers by £1 for every £2 of income that goes over £260,000. So, if you're earning £300,000, for example, you will only only get tax relief on the first £4,000 you put in your pension each year.

    Importantly, you can carry over any unused allowance from the previous three tax years (when the allowance was set at £40,000, rather than the current level of £60,000). So, some could technically pay in a maximum of £180,000. Bear in mind that money paid by someone else, such as your employer, counts towards these allowances.

    2) The 'Money purchase annual allowance' limit. If you've started taking money from your pension, your annual allowance will be set to £10,000 (to stop you taking large amounts from your pension and then putting it back in to get tax relief). This was increased from £4,000 in the Spring 2023 Budget, as the Chancellor didn't want it to be an obstacle for older people getting back in to, or staying in, the workplace. 

    3) The lifetime limit. The 'lifetime allowance' (LTA) was £1,073,100, but in the 2023 Spring budget this was scrapped. So there's now no overall maximum you can put in your pension during your working life. However, what was kept is that when you come to retire, you can only take 25% of the old lifetime allowance tax free (so, £268,275), even if your pension is larger.

  5. 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.

    Importantly, too, contributions are based on a band of what are called 'qualifying earnings'. This is any pre-tax employment income between £6,240 and £50,270 (in 2023/24).

    So if you earn £25,000, you'll get at least £1,501 automatically pumped into your workplace pension (calculated as £25,000 – £6,240) x 8%.

    If you earn £50,270, the total will be £3,522 (calculated as (£50,270 – £6,240) x 8%). But if you earn say £55,000, the 8% is still based only on earnings between £6,240 and £50,270, so the total minimum contribution remains £3,522.

    You can say ‘no’ to auto-enrolment if you don't want to join. But it's an opt-out rather than an opt-in scheme, so if you do nothing, you'll be opted in.

    We've got a full guide on auto-enrolment, which will tell you everything you need to know.

  6. 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 if your employer offers it.

    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 an incentive to operate the scheme.

    • Basic rate taxpayers. Because your pension contribution comes out of your pre-tax salary, you'll pay less income tax at 20%. You'll also avoid your 12% NI contributions on the amount you sacrifice. This means for every £68 you sacrifice from your pay packet, £100 goes into your pension pot. 
    • Higher or top-rate taxpayers. If you pay tax at the higher 40% or 45% rates, salary sacrifice means you don't have to claim back the extra tax relief yourself – as you are never taxed on those contributions in the first place – and you don't have the NI deducted on those contributions either. To deposit £100 in your pension pot, you only have to give up £58 from your pay packet, as no tax or NI is deducted as a higher-rate payer. For a top-rate payer, you only give up £53.

    One thing to take into consideration with salary sacrifice is that, as the name suggests, you now have a lower 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 2023/24, 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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  7. Should I take my employer's pension? (Yes... if you don't, you're throwing away a pay rise)

    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 opt out and you're throwing away free cash from your employer. It may not be going into your pay packet, but it is cash going towards your future.

    Martin's written a blog on why this is so important. See his Important warning to every employee explainer. 

  8. Should I 'consolidate' my pensions?

    Pension consolidation means combining all (or some) of your pensions into one pot. There are definite advantages, but there are also reasons why some shouldn't do it. 

    Advantages include:

    • You can save on fees if you transfer to a cheaper pot.
    • There's less admin and paperwork for you to keep track of.
    • You can easily see your pension amount in one place so you know how much is in your pot.
    • Newer pensions are often easier to access at retirement.

    But there could be some downsides too:

    • Your existing pensions may have investments more suited to your attitude to risk.
    • Your pensions may have exit penalties so you'll have to pay to transfer them.
    • You could be giving up valuable benefits such as guaranteed payouts. 

    Unless you're very financially savvy, it's unlikely you'll know the full ins and outs of your pension scheme and whether transferring in to one pot is the right thing to do. So the best thing for most is to get guidance or advice before doing anything... as get it wrong and it can cost you. For full help to find an adviser, see our financial advice guide.

  9. 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. 

  10. What are 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 (sometimes called defined benefit schemes, or in some cases Career Average Revalued Earnings 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. 

    What that percentage is depends on how long you worked for that particular firm. There is normally an 'accrual rate' set by your employer as a fraction of your final salary.

    Say the rate is 1/60th, you get 1/60th of your final salary as a retirement income for each year you worked for that firm. So if you worked for 30 years, you'd get 30/60ths, or half your final salary with that firm.

    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. 

    When you retire, you either withdraw cash from your plan or swap its value for an annuity – an income for life.

    Most workplace pensions and all personal pensions are money purchase. 

    Pension plans can also be categorised as:  

    • Workplace pension schemes. This is where you and/or your employer make regular monthly payments, with that money invested by a pension company until you hit retirement. There are two types of workplace pensions: trust-based and contract-based pensions.
    • Trust-based pensions. A board of trustees manage investments on your behalf. You and possibly your employer pay into the pot, and it's invested. The trust fund is kept at an arms length principle, separate from the company. What's more it allows benefits to be handed to your partner or other dependant members.
    • Group personal pensions. This type of pension is between you and a third party insurance provider. The provider isn't required to act in your best interests. The snag is that your employer chooses the provider, but these arrangements usually offer you a choice of investments.
    • Stakeholder pensions. These are similar to workplace pensions, but have low and flexible minimum contributions, capped charges and a default investment choice. You won't have to decide where to put your cash.
    • Self-invested personal pensions (SIPPs). These are DIY pensions, allowing you to choose your investment. Investors prepared to do the legwork themselves can run a SIPP on the cheap, if they use the right provider. Read a full guide to SIPPs. 

    Quick question

    • What about the state pension?

      This is available when you reach state pension age, currently 66. While the old-style basic state pension has gone up to £156.20/a week for 2023/24, state pension for people reaching retirement age after April 2016 has gone up to £203.85/a week. You build up entitlement to the state pension by paying national insurance (NI) contributions throughout your working life (see the State pensions guide) – or by being awarded NI credits.   

      The table below shows how the different pensions differ:

      PENSION Can you contribute? Can your employer contribute? Do you invest the cash?
      Workplace pension Yes Yes Yes
      Stakeholder pension Yes Yes Yes
      SIPP Yes Yes Yes
      Trust-based Yes Yes Yes
      Group Yes Yes Yes
      Final salary Yes Yes No
      State pension Yes, by paying NI No No

  11. Should I go for a stakeholder pension if I just want something simple?

    Although there aren't many around these days, stakeholder pensions are designed to be simple, entry-level products, with a few key features:

    • Low and flexible minimum contributions. You can usually pay in from as little as £15 to £20 per month.

    • Capped charges. Stakeholder pensions can't charge you more than 1.5% of your pot size as a management fee for the first 10 years, and it's capped at a 1% after that (though it's worth noting many SIPPs will undercut this, though their charges aren't capped). 

    • Simple investment choices. They tend to invest in a narrower range of funds, usually offering a default investment choice, so unlike a SIPP, you won't need to do the research yourself and play an active role in fund selection. 

    There isn't a huge range of providers offering stakeholder pensions, but Aviva and Standard Life do and they're good places to start.

  12. Who's holding my money when I save in to a pension?

    With most workplace pensions, your employer chooses a third-party pension company, such as Aviva or Standard Life. Usually there will be a default fund, selected by (or on behalf of your employer) and if you do nothing, your pension contributions will be invested in to this fund.

    But most schemes will also allow you to choose your own investments. If you're doing this, it's best if a) you're confident in managing your own money, b) you've thoroughly researched the funds your provider offers and selected the best ones for your risk profile, and c) you have the time to check in every so often that they're still performing well.

    If you start your own pension, it will also be managed by a pension firm but you will always make the investment decisions, unless you opt for a robo-SIPP. For more information, see our Cheapest SIPPs guide.

  13. 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. Many choose a Self-invested Personal Pension (SIPP) - see our Cheapest SIPPs guide for how.

    But unless you're financially savvy, you'll likely benefit from seeing an independent financial adviser (IFA), given the whole host of pension charges to watch out for. See our Financial advisers guide for how to pick an IFA, including what getting advice will cost you.

  14. Self-employed and don't get a workplace pension? It's time to do your homework

    If you're self-employed you won't get a workplace pension, but saving for retirement is still a valuable thing to do. You get the same tax advantages that an employed person gets, so 20% relief added to the pension pot, and the ability to claim extra tax relief (via self assessment) if you're a higher or top-rate taxpayer.

    But you need to choose how you want to save for retirement. The options are...

    • SIPPs (self-invested personal pension plans). These are DIY pensions, allowing you to granularly choose your own investments. If you know what you're doing SIPPs can be low fee and very flexible. See our Cheap SIPPs guide to check if they're right for you. 

    • Standard and stakeholder pensions. Here you have a simpler choice of options, and with a stakeholder pension the charges are capped. See what is a stakeholder pension? for more info and how to get started.

    • Robo-investing pensions. Here you put money away and the investment is chosen automatically for you by an algorithm, it's very simple and easy, but far more limited choice.  These are usually offered as SIPPs, so see Robo-investing for pensions.

    • Lifetime ISA (LISA). 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. You can have a LISA in addition or instead of the other options.

      Unlike for those who are employed (where LISAs are unlikely to be as good as the matching-employer's contribution), for self-employed people who pay basic rate tax, LISAs can be worth a look - though they won't be if you pay higher- or additional-rate tax. See Lifetime ISAs vs pensions.

    Confused? Here's where to get help

    Starting a SIPP or stakeholder pension means you get no advice, which might not be a problem.

    But if you're confused, unsure, or have complex circumstances, it's likely better to pay a few hundred pounds upfront so you don't end up losing thousands over your lifetime. Independent Financial Advisors (IFAs) are able to help you – see where to seek financial advice.

    Or if you're over 50, you can also book a free 60-minute appointment with Pension Wise, which can offer free, impartial guidance on your retirement options.

  15. 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; it'll be aged 57 from 2028 onwards). 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...

    Important! If you get approached by people saying you can access your pension before you turn 55, it's a scam known as pension liberation or unlocking (for full details of how to release money from your pension legitimately and how to avoid scams, read our Pension liberation guide).

    But, when you're 55+, it's decision time. Of course, you can carry on working until whatever age you like, but once you've made the decision to retire, you'll need to look at how you want to take your pension. 

    You can take a tax-free lump sum of 25% of your total pension pot (or of each pot if you've more than one) and use that for whatever you like - though you don't need to take anything at all. For what's left, in general, your choices are:

    • Leave the money where it is, to continue getting interest or investment growth.
    • Use the money to buy an annuity, where you get a set income for life.
    • Go in to drawdown, where you take a sum from the pension pot each year.

    Do note that if you have taken a 25% tax-free lump sum, anything you take above this 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.

    Accessing your pension for the first time?

    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 60-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.

    You don't have to do this, but it can really help, especially if you're not sure what's right for you.

  16. You can do anything you like with your pension cash (just do it carefully so you don't pay too much tax)

    Pension freedoms introduced in 2015 mean that anyone who's aged 55 or over can take their pension money however they want, whenever they want.

    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.

    Assuming you've not taken all your pension out, the remaining options are:

    • Option 1 - leave it invested in your pension for when you need it. Do this and it's important to understand that when you withdraw cash you get 25% of each lump sum you withdraw tax-free. So, for example, if you had £100,000 and took £20,000 out you'd get £5,000 of it tax-free – the rest would be taxed at your current rate. 
    • Option 2 - take 25% tax-free, then do 'income drawdown' on the rest. In drawdown, you keep the rest invested so it can still hopefully grow, but you can also use it to take income when needed. 
    • Option 3 - take 25% tax-free, then buy an annuity. This gives you a guaranteed income each year for the rest of your life. 

    Taking money from your pension can be taxing - if you do it the wrong way!

    Don't start taking money out without first getting guidance as get it wrong and some pay £10,000s more than they need to in tax. Martin's swiss roll (yes, the sponge cake) explantion may help you understand it (and make you peckish)...

    Martin Lewis explains how taking money out of your pension early could cost you thousands in tax
    Embedded YouTube 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.

  17. What happens to my pension when I die?

    While it's not fun to think about, there are some important things you need to know about passing on your pension when you die. The most important thing to note is that you can't leave a company or private pension in your will. And that pensions are not subject to inheritance tax. 

    You must declare who should get your pension pot 

    As part of setting up a workplace or private pension, you'll be be asked to complete an 'expression of wishes' form (also called a 'nomination' form). This states your preferences as to who should receive your pension savings if you die before you retire. While the pension administrators are not obliged to follow your preferences, they'll take them into account in most cases. 

    You might have completed the form without realising, but it's a good idea to check it's up to date – especially if your circumstances have changed over the years. See our Expression of wish guide for all the ins and outs. 

    Is my pot subject to inheritance tax? 

    The exact 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:

    • Money purchase schemes

      Money purchase schemes (which include most private company pensions) are generally NOT considered part of your estate when you die.

      So it's important to nominate someone, several people or even a charity or company to receive your pension when you die. 

      These nominations are important before AND after you start taking your pension, because DC pensions can be passed on to someone else.

      By filling in an 'expression of wishes' form with your pension provider(s), also known as nominating a beneficiary, you can specify who you want to receive your pension when you die, as well as the percentage of your pension you'd like each beneficiary to get.

      What they then receive depends on:

      • If you die BEFORE you turn 75:

        - and you HAVEN'T started taking your pension        , the recipient usually won't be liable for any tax on it (as long as the pension is paid within two years of your death). In this scenario, your beneficiaries can choose how to receive your pension – as a lump sum, drawdown, or via an annuity.

        - and you HAVE started taking your pension        , how you've chosen to access it will determine what your beneficiaries can do next.

        If you've withdrawn a lump sum and have remaining cash in your bank account, this will be counted as part of your estate and will be subject to inheritance tax.

        If you've opted for drawdown, your beneficiaries can access whatever's left in your pension entirely tax-free. They can then use this for further drawdown payments, take a lump sum or buy an annuity.

        If you've already started receiving income from an annuity before you die, this usually stops when you die and can't be passed on to a beneficiary. 
      • If you die AFTER you turn 75, the person who gets your pension will usually pay tax at their normal rate (20%, 40% or 45%, depending on how much they earn) on anything drawn from the pension. It doesn't matter whether you've started taking your pension or not.

        To avoid this, it's worth thinking about whether to withdraw any available tax-free cash prior to your 75th birthday. 

      It's important to keep your expression of wishes or nominated beneficiaries up to date (for example, if you get divorced and remarry), to ensure that those who you want to receive your pension if you die are named to get it.

      It's also worth reviewing these when you reach 75 years old, because, as above, at this point your beneficiaries will be liable to pay tax on what they receive. So it could mean you choose different beneficiaries, for example grandchildren, who may pay less tax.

      If you don't nominate a beneficiary or fill in an expression of wishes, your pension provider will choose who the money goes to. This is usually your next of kin, or people financially dependent on you.

      If you don't have any next of kin or dependants when you die, and you haven't nominated any beneficiaries, a pension lump sum will usually end up being part of your estate, and so could then be liable for inheritance tax.

      The other advantage of filling in an expression of wishes form for your DC pension is that your nominated beneficiary can also nominate a successor. So in the event that they die too, and there's still money left from your original pension pot, it can be passed down to the next beneficiary.

      In this scenario, the money still won't be subject to inheritance tax (although it may be taxed as income, depending on whether the nominated beneficiary dies before or after the age of 75).

    • Final salary schemes

      With final salary pensions, the rules when you die vary from scheme to scheme. But the main one governing these pensions in death is whether or not you were retired before you died.

      • If you die AFTER you start taking your pension:

      Generally speaking, a pension from a final salary scheme can only continue to be paid to a dependant of the person who died – for example, a husband, wife, civil partner, or child under 23. Some schemes have been updated to include cohabiting partners, even if marriage or civil partnership hasn't occurred. And if a child is financially dependent, for example due to physical or mental disability, then they may continue to receive a final salary pension after the death of the pensioner, whatever the child's age.

      When a final salary pension is passed on to a dependant, the income is taxed at the beneficiary's income tax rate – regardless of the age of the pension-holder when they die (unlike with money purchase schemes). If there's no one to receive the final salary pension on death, then the benefits will no longer be paid.

      • If you die BEFORE you start taking your pension:

      - and you're under 75, your pension may pay out a lump sum (usually a multiple of your salary) to a dependant. This payment will be tax-free for your beneficiaries (as long as it's paid within two years of your death). 

      - and you're 75 or older, your pension may pay out a lump sum (usually a multiple of your salary) to a dependant. Your beneficiaries will pay tax on it, at their usual income tax rate.

    • State pension

      There are some circumstances where it's possible to pass on your state pension payments after death, but the money can only go to your spouse or civil partner.

      The main pension rules governing state pensions in death differ depending on whether you reached state pension age before or after 6 April 2016. See our State pension guide for more info.

  18. What happens to my pension if I get divorced?

    New divorce laws came into force in April 2022. While this may have simplified and sped 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.

  19. 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

    • What if I've held the money in cash?

      If you have a SIPP and decide to hold the money as cash, you are normally covered under the standard £85,000 cover per person per institution, the same as ordinary cash savings.

      Ask your Individual SIPP provider which bank the cash is held in (often they spread it around up to five). Then check whether any other savings you have are in institutions linked to those used for the SIPP cash, as cumulatively you'll only get up to £85,000 protection in each. See what counts as a financial institution

    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.

  20. 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.

    Generally, if you're employed, saving in to a pension is likely to be the more lucrative option, as here your employer also needs to contribute, which they don't in a lifetime ISA. 

    For a full comparison, take a look at Lifetime ISAs vs pensions.

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