What is a pension?

Pensions explained

What is a pension?

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

How does a pension work?

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 as the value of your investments increases.

Different types of pensions

In the UK, there are three types of pensions. You may have several pension pots, especially if you have not yet combined your old workplace pensions into one pot.

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 you get depends on your National Insurance (NI) record and your contributions during your working years. To be eligible, you’ll need to have made these contributions for at least 10 years. You’ll need to have made NI contributions for at least 35 years to get the full state pension.

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 pension: This is a retirement income guaranteed by employers based on an employee’s salary and time 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 closed to new entrants.
  • Defined contribution pension: 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

A personal pension (sometimes referred to as a 'private pension') works in the same way as defined contribution pensions, but they’re managed by the individual rather than by their employer.

You may want to open a personal pension if you are self-employed or not working – or if you want to save a little more for the future. Contributions can be made through personal pension plans. Find out more about personal pensions with our guide.

When can I access my pension?

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.

How can I contribute to my CIRCA5000 personal pension?

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.

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. Tax rules and reliefs may change depending on your circumstances. CIRCA5000 does not provide financial or tax advice, and you are responsible for your own tax reliefs/payments.

Important information - Investments can go down in value as well as up, so you can get back less than you invest. The information on this page isn't investment advice. If you're not sure if an investment is right for you, please seek advice. Tax rules can change and depend on individual circumstances.