Pensions - Frequently Asked Questions

Planning for retirement is really important, but pensions can often seem complicated. We’ve put together a list of questions that we frequently hear. 

Whether you’re planning for a future pension or currently at pension age, we hope this guide will be useful for you. 

1. What is a pension, and how does it work?

A pension plan is a tax-efficient way to save and invest money for the long term for life after work. You - and often your employer - make regular contributions to your pension pot during your working life.

This money is typically invested, with the aim of growing your pension pot over time. When you retire, you can use your pension savings to provide a regular income or take it as a lump sum.

2. What types of pensions are available in the UK?

There are several types of pensions: 

State Pension: A government-provided pension based on your National Insurance contributions.

Workplace Pension: A pension scheme provided by your employer, where both you and your employer contribute.

Personal Pension: A private pension that you set up yourself, which includes options like Stakeholder Pensions and Self-Invested Personal Pensions (SIPPs).

3. How much State Pension will I get?

The amount you receive depends on your National Insurance (NI) contributions. At the time of writing, the full new State Pension is £221.20 per week. To receive the full amount, you’ll need 35 qualifying years of NI contributions. If you have fewer years, you’ll receive a proportionate amount, with a minimum of 10 years required to qualify.

4. What is the State Pension age?

At the time of writing, the state pension age stands at 66 but is gradually increasing to 67 by 2028. It’s important to check your specific State Pension age, as it varies based on your date of birth.

5. How do workplace pensions work?

Workplace pensions are set up by your employer, and you’re typically automatically enrolled if you’re eligible. You contribute a percentage of your salary, and your employer usually contributes as well. The government also adds tax relief to your contributions. The money is invested, and the value of your pension pot grows over time, which you can access when you retire. There isn’t much else we can do. 

6. Can I have more than one pension?

Yes, you can have multiple pensions. Many people have a combination of a State Pension, one or more workplace pensions, and personal pensions. It’s a good idea to keep track of all your pension pots to ensure you’re maximising your retirement savings.

7. What happens to my pension if I change jobs?

If you change jobs, your workplace pension stays with you. You can either leave it where it is, continue contributing to it (if the scheme allows), or transfer it to your new employer’s pension scheme or a personal pension. It’s important to consider the benefits and potential costs before transferring pensions.

8. What is pension tax relief, and how does it work?

Pension tax relief means that some of the money you would have paid as tax goes into your pension instead. For example, if you’re a basic-rate taxpayer, for every £80 you contribute, the government adds £20, making your total contribution £100. Higher and additional rate taxpayers can claim even more tax relief.

9. What is a pension drawdown?

A pension drawdown allows you to take money from your pension pot while leaving the rest invested. You can withdraw lump sums or set up a regular income. However, since your pension remains invested, the value can go up or down, and there’s a risk of running out of money if withdrawals are not managed carefully.

10. What is an annuity?

An annuity is a product you can buy with your pension pot that provides a guaranteed income for life or for a set period. The amount you receive depends on factors like your age, health, and the size of your pension pot. Annuities offer security, but once purchased, they usually can’t be changed or cashed in.

11. Can I access my pension before retirement?

You can usually start accessing your pension from age 55 (57 from 2028), though this may vary depending on the type of pension. However, withdrawing money early can significantly reduce the amount you have available in retirement, so it’s important to consider the long-term impact.

12. What happens to my pension if I die?

The rules depend on the type of pension you have. Defined contribution pensions can usually be passed on to your beneficiaries. If your beneficiaries have the option to inherit your pension pot and access the funds flexibly (also referred to as adjustable income) we would recommend that they seek financial advice. There’s likely to be a charge for this.

Defined benefit pensions may offer a reduced pension to a spouse or dependent. It's essential to check the specific terms of your pension scheme and nominate beneficiaries to ensure your wishes are followed.

13. How much should I be saving for retirement?

This depends on your desired lifestyle in retirement and when you plan to retire. A common guideline is to aim for a pension pot worth 25 times your desired annual retirement income. However, saving as much as you can afford throughout your working life and taking advantage of employer contributions and tax relief is crucial to building a sufficient retirement fund.

14. Should I get financial advice about my pension?

Pensions can be complex, and the decisions you make can have long-term consequences. Getting financial advice can help you make informed choices, especially when approaching retirement or considering significant changes like transferring pensions. Many financial advisers offer a free initial consultation, and some pension providers offer guidance services.

Final thoughts 

Understanding your pension options and how they work is vital to ensuring a comfortable retirement. If you have further questions or need personalised advice, consider speaking with a financial adviser or using government resources like Pension Wise for free guidance. Planning today will help secure your financial future for tomorrow.