Pensions Explained: What Are Pensions? | CIRCA5000

What Are Pensions?

Posted on 21.11.2022 • By CIRCA5000 Team5 min readBack to Blog

Pensions explained


Pensions. We all have them, but they are wrapped in so much jargon that most of us don't fully understand them. So, we've gone back to basics for you.

What are pensions & how do they work?

A pension is a tax-efficient way to save money for the future so that you’ll have an income once you’ve retired.

There are different types of pensions out there (which we’ll discuss in more detail later), but the basic principles of pensions work in the same way:

1. You (and others) contribute to your pension. This is most commonly an employer (who is legally obliged to contribute), although your spouse or children may also pay into your pension.

2. The government applies tax relief to the contributions.

3. You’ll have a pension pot side aside for retirement. Ideally, this will grow as you pay into it, and as the value of your investments rise.

Most personal pensions can be accessed from the age of 55, but you can check the age at which you’ll be able to draw your pension with your provider if you’re unsure. You can usually take up to 25% of your pension as a tax-free lump sum; you then have 6 months to take the remaining 75%, which you’ll likely pay tax on.

When taking the remaining 75% of your pension pot, you could:

  • Take it all or a portion of it out as cash
  • Buy a product that gives you a guaranteed income for life or for a fixed number of years (this is sometimes called an annuity)
  • Invest it (known as flexi-access drawdown) to get an income, whilst reinvesting your remaining funds.

When you set up a sustainable personal pension with CIRCA5000, you can choose to make one-off contributions or set up a regular contribution (which will be collected automatically) – or both! You can also transfer pensions from other providers to your CIRCA5000 pension free of charge.

Different types of pensions

In the UK, there are three types of pensions:

State pension

In the UK, state pensions can be claimed once you reach the state pension age. This is currently 66 years old, but it may change in the future. The amount that you get depends on your National Insurance record and the contributions you made during your working years. To be eligible, you’ll need to have made these contributions for at least 10 years; to get the full state pension, you’ll need to have made NI contributions for at least 35 years.

Workplace pensions

Employers provide workplace pensions to help their employees to save for retirement. There are two kinds of workplace pensions that you’ll come across:

  • Defined benefit pensions: This is a retirement income guaranteed by employers, which is based on an employee’s salary and the amount of time that they spent working there. Usually, both the employer and employee contribute to this kind of pension. Although you may have a defined benefit pension if you work at a large company or in the public sector, they’re becoming rare. Most defined benefit schemes have been phased out completely, or are closed to new entrants in the workplace.
  • Defined contribution pensions: If you have a defined contribution pension, you will be making monthly contributions to a pension pot (your employer can contribute too). The contributions you make are automatically deducted from your salary and paid into a pension account; the amount that you’ll get in retirement depends on how much money has been invested.

Personal pensions


For those who are self-employed or not working – or for anyone who wants to save a little more for their future – pension contributions can be made through personal pension plans. These pensions work in the same way as defined contribution pensions, but they’re managed by the individual rather than by their employer. Find out more about personal pensions with our guide.

What are the benefits of pensions?

The most obvious benefit of pensions is that they provide you with financial security in retirement. Aside from this, however, there are three more key reasons why you should have one:

  • Investment gains: In a defined contribution plan, a pension administrator typically invests your savings on your behalf. This means that the amount you eventually receive could actually be higher than what you initially put in.
  • Employer’s contributions: Employers can make additional contributions (on top of a base salary), to add to your savings.

Tax benefits: Pensions can be thoughts of as a long-term savings plan with tax relief. This means that some of the money that would have gone to the government in tax is actually returned back to you, for the future, and added to your pension pot. Once retired, people are often on a lower income, so they benefit from paying a lower tax rate when they claim their pension income. These benefits are also available to pension contributions made by self-employed individuals.

Discover more about our sustainable pensions today, and start making smarter investments for your future.

When investing, your capital is at risk. You should carefully consider whether opening a CIRCA5000 pension or transferring your old pensions to CIRCA5000 is right for you. Please note that tax rules and reliefs depend on your personal circumstances and may change. CIRCA5000 does not provide financial or tax advice, and you are responsible for your own tax reliefs/payments.


Sign up