Why do I need a pension?

A pension is simply a form of saving for retirement that has generous tax benefits. The money you save in a pension builds up into a pot which could be converted into a fixed or flexible taxed income or can be taken as a single or series of cash lump sums. You can take 25% of this tax-free with the remainder being taxed.

A pension is designed to help you fund your retirement and replace the income you are no longer receiving from working. It can fit alongside all your other savings, from bank and building society accounts to property.

It's important to think about the income you're likely to need in retirement.

Pensions could be one important way to support your retirement. Another may be your home (some people talk about their property as their pension) and another could be all your other savings and investments such as deposit accounts and shares. Your retirement income may come from any combination of these.

Average life expectancy is also increasing, meaning that the length of your retirement could be longer than you expect. So it's important to think about the income you're likely to need in your retirement and how a pension could help generate it.

With any form of investment, including a pension, the value can go down as well as up and so it is worth noting that you may not get back what you put in.

There are three main categories of pension provision to consider: State pensions, Company pensions and Individual pensions.

The benefits of Pensions

There are several benefits of using pensions to save for retirement:

• Tax relief
  When you save in a pension the taxman helps to increase your pension pot by providing tax relief, subject to certain limits.
• Tax-efficient growth
  Money in your pension fund grows largely free of tax. This could help to boost the amount you have in you fund.
• Employer contributions
  With company pensions your employer makes contributions to your pension, increasing the amount going into your fund. Depending on the scheme, they may match up to 100% of the contributions you make.
• Access to investing in funds
  By saving in a pension, you're able to put your money in a range of investments, such as the stock market, commercial property, bonds, and funds. The range of investments will depend on the scheme.
• Access to tax free cash in retirement
  When you take your benefits you may have the option of taking up to 25% of the pension fund you have built up as tax free cash (depending on your age, the scheme rules and tax allowances). So if you build up a fund of £100,000 for example, you may be entitled to take £25,000 as a tax free cash. The remainder would be taxed as earned income.

You now also have more freedom over how you take your tax-free cash, following pensions changes introduced by the government in April 2015.

The above is based on our understanding of current tax legislation and HM Revenue & Customs practice, both of which may change without notice. The impact of taxation (and any tax relief) depends on individual circumstances.