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How pensions work

Learn the basics about the three types of pension – state pension, workplace pensions and personal pensions – and how they work.

In this article
What is a pension? What is the state pension?
What is a workplace pension? What is a personal pension?

What is a pension?

A pension is a way of saving for your retirement. You put money into your pension each month and, in return, you get a regular income once you've retired.

You don't have to pay tax on pension contributions, which is one of the reasons saving into a pension can be more effective than saving for your retirement in other ways.

There are three types of pension – state pension, workplace pensions and personal pensions. All three types are available to everyone, as long as you are in employment.

 

What is the state pension?

When people reach state pension age (currently 66), they will receive an income from the state, called the state pension. 

To claim the state pension you have to have made National Insurance (NI) contributions throughout your working life – you can read more on this in our guide, your state pension and benefits.

What is a workplace pension?

The state pension will not be able to provide all your retirement income, so most people also save into a pension with their employer.

Workplace pensions take contributions from you, your employer and the government, and use them to provide you with money to live on when you retire.

Your contributions will take the form of a percentage taken from your salary each month, and your employer's will also be added as a percentage of your pay. 

The fact that your employer pays into your workplace pension is one good reason for having one – it is like extra pay.

These contributions will be invested, with the aim of increasing the amount you have to retire on.

There are two types of workplace pension – defined benefit and defined contribution.

You can find more information in our guide - what is a company pension?.

What is a personal pension?

A personal pension is a type of defined contribution pension that you arrange yourself.

Like workplace pensions, personal pensions invest your money with a view to increasing it.

Personal pensions are particularly suitable if you're self-employed or not in work, and so don't have access to a workplace pension. But anyone can save into a personal pension.

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