A pension is a tax-free pot of money that you contribute to throughout your employment. You and your employer make regular payments (most often monthly) into your pension and when you retire, the money is repaid to you in installments.

After retirement, most people are reliant on their pension as a regular source of income. A pension is highly recommended as it takes pressure off you to save for later life while you’re working.

Final salary pensions - sometimes referred to as defined benefit schemes - are largely funded by employers. With this pension, you get a percentage of your final salary before retirement, or when leaving the company, as an annual income.

Money purchase pensions - also known as defined contribution schemes - are when you save your pension under a ‘money purchase arrangement’. The amount you’ve saved can then be withdrawn or swapped for an annuity - an income for life. Most personal pensions are saved for by this method, which includes; workplace, trust-based, group personal, stakeholder, and self-invested personal pensions (SIPPs).

State pension - this is where you get a small pension (currently £155.60 per week) from the government when you reach retirement age. You build up entitlement to the state pension by paying national insurance throughout your working life.

When auto-enrolled into a pension plan, there is usually a minimum percentage that you have to contribute, dependent on the provider - but if you can afford to pay more, it is recommended that you do.

As a rule of thumb, you should take the age that you start your pension and halve it - this is the percentage of your pre-tax salary that you should put aside each year until you retire, including your employer’s contribution.

You can transfer most pensions, but it is highly recommended that you seek financial advice before doing so to ensure you’re making the right decision. There may also be different restrictions on the different pensions you have, dependent on the type and the provider.

You’ll find more information on consolidating pensions on our dedicated page, or you can get in touch with a member of our team on 0345 340 9690 to discuss your specific circumstances.

There is a lot of flexibility around how you can take your pension, but you cannot take any money until you are 55. You can choose to buy an annuity - a guaranteed income for life, or you can use it to provide a drawdown - a flexible retirement income.

You can also choose to take small cash lump sums, take the whole amount as cash, leave it untouched or mix some of these options. The best option for you will depend on your retirement plans.

Once you are 55, you can choose to take your pension but still carry on working. You can also continue paying into your pension without paying tax until you are 75.

Any amount you withdraw from your pension over 25% will be taxed, and it is recommended that you still leave enough money in your pension for when you do retire.

It is also possible to access your pension before you are 55, but it is not advisable as it comes at a significant cost. The company that acts on your behalf will charge around 30% of the amount you’re withdrawing from your pension as an administration fee and on top of this, you will have to pay 55% tax on the amount you withdraw.