What is a pension scheme and how does it work?

A pension gives you money to live on when you’re older, so you can retire and give up work.  

You’ll usually get a regular income for life, but you might also be able to take some or all of the money as one or more lump sums – sometimes tax-free. 

You usually need to save into one or more pension schemes over many years to build up enough money to retire on. 

Pensions will typically grow your money at a faster rate than other types of savings, as other money is often added when you pay in. This includes: 

• money from your employer – this might even be more than you pay in

• tax relief – the Income Tax you’d normally pay on the money is added to your pension instead.

In the most common type of pension scheme, your money is usually managed by professional investors. This means you’d also expect to see extra money from investment growth. But, like all investments, this isn’t guaranteed. 

For more information on the benefits of saving into a pension, see our guide Why should I save into a pension? 

The State Pension is a weekly amount you can claim from the government when you reach your State Pension ageOpens in a new window

By itself, it’s unlikely to give you much money to live on – especially if you don’t qualify for the full amount.

For more information, see our guide State Pension: how it worksOpens in a new window

Here’s how a typical pension works, called a defined contribution scheme:

1. You usually make regular payments in, called contributions. If your employer sets up your pension (called a workplace scheme), this is usually a percentage of your wages each month. If you set up a pension yourself, you can usually choose how much and how often to contribute.
2. Your contributions are usually boosted by tax relief – money you would normally have paid in Income Tax is added to your pension instead.
3. In a workplace pension scheme, your employer might contribute extra money on top – typically at least 3% of your wages.
4. Your pension money is invested so it should grow over time – you usually won’t pay tax on any growth. The pension provider or trustees normally manage these investments for you.
5. You can usually access your pension from age 55 (57 after April 2028) but many pensions are designed so you’ll get more if you wait until your scheme’s ‘normal retirement age’, which is typically over age 65.  
   

Most pensions will pay you an amount based on how much is paid in and how well the investments perform. This is called a defined contribution pension and means the value of your pension could go up or down until you’re old enough to take the money.

The other type of pension promises to pay you a set amount, even if the investments perform badly. This is called a defined benefit pension (often called a final salary or career average scheme). 

The amount you’ll get is typically based on how much you earn and how long you’re a member of the scheme. Defined benefit schemes are less common now and typically only offered to new members in the public sector, such as education and healthcare.  

After you turn 55 (57 from April 2028), you can often choose to start taking money from your pension. You don’t have to start taking your pension at this age, the money in the scheme will usually keep growing the longer you leave it invested.

Take time to understand your options – how you decide to take your pension can affect your income for the rest of your life.

Any money left in your pension when you die can usually be passed on to your relatives or a charity of your choice.  

For more information, see our guides: 

• What can I do with my pension pot?

• What happens to my pension when I die?

Use our Pension calculator to work out an estimate of your retirement income. How much you’ll get will depend on many factors, including how much money is in the scheme and when you’d like to retire.

If you already have a pension, your provider can tell you how much your pension is currently worth and an estimate of the retirement income you’re on track to get. You can often find this information:

• online, by logging into your pension provider’s online account

• by calling your pension provider

• on statements sent to you by email or post.  

If you’re employed, your employer can set up a workplace pension for you. This usually happens automatically if you meet the criteria for auto-enrolment, but you can also ask to join.

If you’re self-employed or want an additional pension, you can set up a personal pension with a provider of your choice.

For help, see our guide How to start your own pension.