Pension essentials

Whether you're just starting out with your pension or looking to make the most of your existing plan, making informed decisions will help you take control of your financial future. Let’s get to grips with how pensions work so you can improve your long-term financial health.

Why am I paying into my pension?

Paying into your pension means you’re actively building a future fund that will support you in retirement. By saving a little now, you can enjoy a more comfortable retirement later. Plus, pensions offer unique benefits, like tax relief, which can make them an efficient way to save.

Your pension is invested

When you contribute to your pension, the money doesn’t just sit there – it’s invested across various assets, such as stocks, bonds, or property. These investments grow over time, with the potential for compound interest to help your savings increase. The earlier you start, the more you can benefit from this long-term growth.

A clear view of your pensions

Keeping track of your pensions is essential for knowing where you stand and making sure you’re on track with your retirement plans. If you’ve worked in several jobs, you may have multiple pensions. You can use our pension tracking tool so you have all your pension savings in one place. By combining your pots, you’ll have a single, manageable view of your savings and could also save on charges.

What is an employer contribution?

One of the biggest advantages of a workplace pension is employer contributions – it’s free money. In the UK, the minimum total pension contribution for employers and employees is 8% of your wages, with a minimum of 3% coming from the employer. 

However, if you pay more than the minimum 5% as your contribution, many UK employers will match your contributions up to a certain percentage, effectively adding more money into your pension savings. This additional contribution can make a significant difference over time, helping your retirement savings grow faster..

What is a workplace pension?

A workplace pension is arranged by your employer, and it’s a simple and effective way to start saving for retirement. You pay in a portion of your salary, and your employer usually adds to it. There are two main types in the UK:

• Defined Contribution (DC): Your contributions are invested, and the value of your pension depends on investment performance.
• Defined Benefit (DB): Also known as a final salary scheme, this type provides a guaranteed income in retirement based on your salary and length of service.

How tax relief helps your pension grow

In the UK, pensions benefit from tax relief, which means that a portion of the money you’d normally pay in tax goes directly into your pension. For example, if you’re a basic-rate taxpayer, for every £80 you contribute, the government adds £20, effectively boosting your savings. Higher-rate taxpayers may be eligible for even more tax relief.

Tracking your state pension

Beyond your workplace or personal pension, the State Pension can provide a valuable source of retirement income. You can check your State Pension forecast online to see how much you might receive and when you’ll be eligible.

Reviewing your pension regularly

Your pension isn’t something to set and forget. Regularly reviewing your contributions and investments can help you stay on track to meet your retirement plans. With the Smart Pension app, you can use our helpful pension calculator, view your investment performance and even see the difference increasing your contributions could have on your retirement. Doing so makes staying in control of your future even easier.

Final thoughts

Saving for retirement might seem daunting, but understanding these essentials can empower you to make the best choices for your future. Take advantage of employer contributions, tax relief, and regular reviews to help your pension grow. By starting today, you can build the retirement you want. The Pension and Lifetime Association (PLSA) has a helpful guide to give you an idea of the cost of living in retirement.

Find more ways to plan for your retirement here.