A pension is like a savings account, and the aim is to ensure a person has money when they stop working (retire). For most of a person’s life, money can be paid into the pension. At retirement, money can be taken from the pension or used to purchase an insurance product called an ‘annuity’, which pays a regular income until death.
In order to encourage people to save into a pension, the government offers tax relief on payments made into it. Tax relief means the government puts the income tax it would normally collect into the pension instead. Gains from pension investments are also largely tax-free.
There are several different types of pension:
The State Pension is paid by the government to those who have made enough National Insurance contributions over their working lives. This is a small amount (currently £168.60/week) and most people will need extra savings to maintain a comfortable standard of living.
A Personal Pension is purchased and funded by an individual (although contributions can also be made by an employer).
A Workplace Pension is offered through an employer. All employers are now obliged to offer a pension scheme to eligible employees, automatically enrol them and contribute to the scheme.