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