Put simply, saving into a pension is like any other form of long-term saving. You put money away regularly by paying pension contributions.
If you’re in a workplace pension, your employer also pays money into your pension savings in the form of contributions. This means you are in effect getting ‘free’ money in your pension savings each payday.
Workplace pensions are valuable because your employer contributes too. This means you are in effect getting ‘free’ money in your pension savings each payday.
You don’t pay any income tax on pension contributions. This is known as ‘tax relief’. It means the income tax you would have paid goes into your pension savings instead.
You can contribute up to the whole of your salary towards your pension savings and still get tax relief, as long as the total amount you and your employer put into your pension savings is below the annual allowance. This allowance is currently £40,000 a year.
Under the current rules you can build up around £1 million in pension savings over your lifetime without having to pay any extra tax. This is known as the lifetime allowance. The lifetime allowance applies to all the pension schemes you belong to, not each pension separately and excludes your State Pension.
When you reach retirement you can usually take some of your pension savings as tax-free cash.
Your pension is ‘ring-fenced’ for your retirement. You usually can’t take money out of pension savings until you’re at least 55.
The only exceptions are:
- You qualify to take pension savings early because of serious ill-health, or
- your pension scheme’s rules allow you to take pension savings earlier (and this is rare).
It’s currently expected that the minimum age for taking pension savings will increase to 57 in 2028.