Pensions

older Indian man sitting in a chair with a cup of tea When we get older, most of us do not work anymore and there are others of us that have to stop work earlier because of ill health. Once we have stopped working and getting wages, we still need money to live on. This money is called a pension.

Step 1: How pensions work

The idea behind pensions is that we pay into them during our working life and then when we retire or reach a certain age, the pension scheme pays us a regular income for the rest of our lives.

There are quite a few different pensions about and people often have more than one type, so how much money you are going to get and when you get it depends on which pensions you have.

Step 2: Different types of pensions

The following is a brief look at the different sorts of pensions available. Pensions are complicated, so for more detailed information, visit the Government’s Directgov website (link opens in a new window).

Basic State Pension

This is a pension paid by the Government to everyone who has paid enough national insurance contributions.

We get our pension from the Government when we reach State Pension age. This used to be 65 for men and 60 for women, but the rules are changing for some people. Between 2010 and 2020, the State Pension Age for women will rise to 65 and between 2024 and 2046 it will rise to 68 for both men and women. See the Government's Directgov website for more information on changes to the pension age (link opens in a new window)
To get a full basic State Retirement Pension, you need 30 qualifying years of national insurance contributions. This is a rule change that took effect on the 6 April 2010. Previously, men normally needed 44 years and women 39 years)
From 6 April 2010, once you have built up a single qualifying year of national insurance, you qualify for at least some basic State Retirement Pension
From 6 April 2010, it will be easier for parents and carers to build up qualifying years of national insurance and get a State Retirement Pension
If you continue to work after retirement age, you can either claim you State Pension while you’re working or defer it
A Pension Credit is available from the Government to make sure people always have a certain level of income and there are also various benefits that you can continue claiming in later life
See our information sheet on State Retirement Pension for more information.

Personal pensions

A personal pension is a pension that you pay money into during your working life. You pay a regular amount or a lump sum to a pension provider, which is a financial organisation that provides pensions. They invest the money for you to create an income that you can live on once you have retired.

You can save as much as you like into as many pension schemes as you want
The Government gives you tax relief on the pension contributions you make, which helps your fund grow
How much money you get depends on how much you have contributed and how well the fund has performed in the money markets
When you retire you can take a tax-free lump sum from your fund and then the rest is used to provide an income for life. The Money Made Clear website has a guide that talks you through the various pension options (link opens in a new window).

Work-related pensions

Most companies offer pension schemes for their employees and the law is changing so that by 2012 it will be compulsory for all employers to do this. There are different types of work-related pensions and what you are offered will depend on where you work.

Occupational salary-related schemes. Your employer usually contributes to the scheme and how much you get when you retire depends on your salary and the length of time you have been a member of the scheme
Occupational defined contribution schemes. With these schemes your employer builds up a personal fund for you, which is converted into an income at retirement
Stakeholder pensions and personal pensions. See our section on personal pensions above.

The Money Made Clear website has a guide to pensions (link opens in a new window) , which goes into these in more detail.

It also has a Stakeholder pension decision tree tool (link opens in a new window), which is designed to help you make choices about your pension arrangements.

Step 3: Further information on pensions

The Government wants us to save money for our retirement, so to encourage us it gives us tax relief on money we put into personal and company pensions. See Tax. Also the Directgov website has specific information on pensions and tax (link opens in a new window).
If you have contributed to a pension in the past but have lost the details, the Pension Tracing Service (link opens in a new window) should be able to help you.
See Retirement.

Last updated: 27 April 2010