Why should I save into a pension?

A pension is a way to save money for many years, so you can give up work when you’re older.

You can usually take money out of your pension from age 55 (57 from April 2028) and will typically get a regular income for life. But you might be able to take some or all of the money as one or more lump sums – sometimes tax-free. 

For more information, see our guide about how pension schemes work.

The State Pension is a weekly amount you can claim from the government when you reach your State Pension ageOpens in a new window It’s normally paid every four weeks.

The amount you’ll get depends on how many qualifying years of National Insurance contributions or credits you have. You can check your State Pension forecastOpens in a new window on GOV.UK to see how much you’re on track to get.

For more information, see our guide State Pension: how it works.

To get an income after you stop working, you need to plan how to fund your retirement. Here are five reasons to use a pension to do this.

Even if you qualify for the highest amount of State Pension (currently £230.25 a week), it’s unlikely to give you much spare money when you retire.  

The Retirement Living StandardsOpens in a new window lists how much income you might need each year for a comfortable retirement.

You’ll also need to wait until you reach your State Pension ageOpens in a new window before you can claim it.

Saving into your own pension (either through your employer’s workplace pension or a personal pension you set up) means you can:

• choose to take money from age 55 (57 from April 2028) or younger if you need to retire due to poor health

• still claim the State Pension when you’re old enough.

You usually pay Income Tax on money you earn. But if you pay into a pension, the tax you would have paid is usually added to the pension. This is called tax relief.

For example, if you pay £80 into your pension as a basic-rate taxpayer, tax relief will top it up to £100. 

If you pay Income Tax at a higher rate than 20%, you get extra tax relief too – but you might need to claim it yourself. You can see the Income Tax bandsOpens in a new window  and  Scottish Income Tax bandsOpens in a new window on GOV.UK. 

If you earn less than £3,600, you can save up to £2,880 into a pension and still get 20% basic-rate tax relief. 

Each tax year, you can usually get tax relief on your pension contributions up to 100% of your earnings or £60,000 – whichever is lower.

For more information, see our guides:

• How tax relief boosts your pension contributions

• The annual allowance for tax relief on pension savings

If you have an employer, they must pay extra money into your pension if:

• you're between age 22 and your State Pension ageOpens in a new window

• you earn £6,240 or more a year. 

They can choose to pay in if you earn less.

This is called an employer contribution and is typically at least 3% of your wages – but can be much higher.

Always check if your employer offers contribution matching. This means your employer will increase their contribution if you pay in a higher amount, up to a certain limit. 

For example, if your employer will match up to 10%, they’ll often pay in 10% of your wages if you do too. If you pay in 5%, they’ll pay in 5%.  

Pension providers aim to grow your pension pot by investing the money. 

If you have a defined contribution pension, the value of your pension could go up or down until you take the money. Safer investments are often used the closer you get to retirement – you can ask your provider if they do this.

If you have a defined benefit pension (often called a final salary or career average scheme), you’ll get a guaranteed income for life even if the investments perform badly. This is based on how much you earn and how long you’re a member of the scheme. 

Defined benefit pensions are less common now and typically only offered to new members in the public sector, such as education and healthcare. 

From age 55 (57 from April 2028), you often have the option to take up to 25% of your pension as one or more tax-free lump sums – even if you’re still working and paying into a scheme.

This means you won’t have to pay any Income Tax to receive that money. You’re then free to spend or save it in any way you like, such as:

• paying off a chunk of your mortgage

• improving your home 

• buying a car or holiday.

Taking a tax-free lump sum can reduce how much income you’ll get later on, but some defined benefit schemes offer both an income and an automatic tax-free lump sum on top. 

If you have a defined contribution pension, you can choose to take an income in a few ways. Our guide explains all your options for taking a defined contribution pension. 

If you’re employed, your employer can set up a workplace pension for you. This happens automatically if you meet the criteria for auto-enrolment, but you can also ask to join. 

If you’re self-employed or want an additional pension, you can set up a personal pension with a provider of your choice. 

For help, see our guide How to start your own pension. 

If you have a workplace pension (one set up by your employer), you usually need to save at least 5% of your wages – unless your employer lets you pay in less.

If you set up your own pension, your pension provider might have a minimum amount you must pay in each month, like £100. But you typically need to pay in much more than the minimum to save enough for a comfortable retirement. 

Our Pension calculator can work out an estimate of your retirement income, including how much you might need and how it could change if you save more.  

If you have a defined benefit pension, how much you get depends on your salary and how long you work for that employer. To pay in more, you'll need to check if your scheme lets you build up extra benefits. If it doesn't, you'll need to set up your own pension for any additional savings. 

It’s usually never too late to start a pension, especially if your employer will also pay in – you’d miss out on this extra money if you didn’t join the scheme.  

Example: If you and your employer save £200 into a defined contribution pension each month, at age 65 your pot could be worth around:

• £316,000 if you start at age 20

• £224,000 if you start at age 30

• £146,000 if you start at age 40

• £80,000 if you start at age 50.

The only risk is if you’re close to your State Pension ageOpens in a new window and unlikely to get the full amount. This is because you might currently be eligible for Pension Credit, which could top up your income for free. Even a small pension income can mean you no longer qualify.

You can check your State Pension forecastOpens in a new window on GOV.UK and use our Benefits calculator to see if you can claim any payments, grants or discounts. 

It’s a good idea to have more than one way of saving for your retirement. For example, you could pay into a pension and put money into a savings or investment account.

You won’t get the same boost from tax relief with other types of savings, but there are other tax benefits. This includes:

• Cash ISAs and stocks and shares ISAs that let you keep all your savings interest or investment growth tax-free

• Lifetime ISAs that also pay a tax-free bonus, worth up to £1,000 every year

• Premium Bonds that put you into a monthly draw to win tax-free cash prizes.

You could also consider other types of investment, like renting out property. For more information, see our blog about buy-to-let mortgages.