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Pensions might seem complicated but the basic idea is a simple one. It’s worth understanding their benefits, because your State Pension – while providing a foundation – may not be enough to live on. You need to save more.

The importance of retirement savings

The maximum basic State Pension is far below what most people say they hope to retire on. More than half of people in the UK either aren’t saving at all for their retirement or they aren’t saving nearly enough to give them the standard of living they hope for when they retire. If you fall into this category, you have three choices really. You can:

  • Adjust downwards your expectations of what you’ll be able to afford in retirement

  • Start saving more

  • Retire later

Don’t rely on the State Pension to keep you going in retirement. The maximum basic State Pension of £175.20 (tax year 2020-21) a week is far below what most people say they hope to retire on.

The advantages of saving into a pension

Once you’ve made the decision to start saving for retirement, you need to choose how to do so. Pensions have a number of important advantages that will make your savings grow more rapidly than might otherwise be the case.


A pension is basically a long-term savings plan with tax relief - your regular contributions are invested so that they grow throughout your career and then provide you with an income in retirement. Generally you can access the money in your pension pot from the age of 55

Tracking down a workplace or personal pension

Most pension schemes of which you’ve been a member must send you a statement each year. These statements include an estimate of the retirement income that the pension pot may generate when you reach retirement.


If you’re no longer receiving these statements – perhaps because of changes of address – then to track down the pension there are three bodies you can contact: the pension provider, your former employer if it was a workplace pension, or the Pension Tracing Service provided free of charge from Hemisphere Financial Ltd.

How tax relief tops up your pension pot

Once your income is over a certain level, the government takes tax from your earnings. You can see this on your payslip. If you put money into a personal pension scheme, it qualifies for tax relief. This means that as well as the money you’re putting in, some of your money that would have gone to the government as tax now goes into your pension pot instead. The government will still put tax relief into your pension pot, even if your income is too low to pay tax.

A tax-free lump sum when you retire

When you retire, you can take up to a quarter of your pension pot as a tax-free lump sum. The rest of your savings must be used to provide an income, which is taxable. However, from April 2015 you have been able to use your pension pot in any way you choose from age 55.

Top-ups from employers

The government has introduced a law designed to help people save more for their retirement. It means that employers must start to enrol their workers into a workplace pension scheme if they are not already in one. It’s called ‘automatic enrolment’ and is gradually being made compulsory for all employers.

If your work gives you access to a pension that your employer will pay into, then unless you really can’t afford to contribute or your priority is dealing with unmanageable debt, staying out is like turning down the offer of a pay rise.

Of course, if your employer will contribute to your pension regardless of whether you pay into it, then you should join the scheme whatever your financial circumstances.

How to get an estimate of your State Pension

A State Pension statement will give you an estimate of how much State Pension you may get, based on your National Insurance contribution records to date. It will also help you understand how any future National Insurance contributions might increase the amounts shown.


Get an estimate of the State Pension you’ll get when you reach State Pension age.


State Pension rules have changed for people who reach the state pension age on or after 6 April 2016. This applies to:

• Men born on or after 6 April 1951

• Women born on or after 6 April 1953

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