Pensions Explained: A Plain-English Guide to Planning for Later Life

Pensions have a reputation for being dull, complicated and something to worry about later. But they are simply a way of putting money aside today so you have an income when you stop working, and understanding the basics does not require a finance degree. Whether retirement feels decades away or just around the corner, a clearer picture of how pensions work can help you feel more confident about the future.

The Three Main Types

Most people in the UK will have some combination of the following:

• The State Pension. A regular payment from the government once you reach State Pension age. How much you receive depends on your National Insurance record, built up through work, certain benefits or credits.
• Workplace pensions. Pensions set up by your employer. Under auto-enrolment, most employers must enrol eligible staff, and both you and your employer pay in.
• Personal pensions. Pensions you set up yourself, often used by people who are self-employed or who want to save more.

Defined Benefit and Defined Contribution

Workplace pensions come in two broad styles. A defined benefit pension, sometimes called final salary or career average, promises an income based on your salary and length of service. These are more common in the public sector and older schemes.

A defined contribution pension is more common today. Money paid in by you and your employer is invested, and the amount you end up with depends on how much goes in, how the investments perform and any charges. You then decide how to use that pot when the time comes.

Even a quick look at your pension statements today can turn a vague worry into a clear starting point.

Why Pensions Can Be Worth It

Pensions have some valuable features. You usually receive tax relief on what you pay in, which means some of the money that would have gone in tax goes into your pension instead. With a workplace pension, your employer adds money too, which is why opting out means giving up those contributions. Weigh that carefully before deciding.

Simple Steps You Can Take Now

1. Check your State Pension forecast on GOV.UK to see what you might receive and whether there are gaps in your National Insurance record.
2. Gather your pension paperwork. Many people have several small pots from different jobs. If you have lost track of one, the government’s free Pension Tracing Service can help you find contact details.
3. Keep your details up to date with each provider when you move house or change email address.
4. Nominate beneficiaries so your provider knows who you would like to receive any money if you die.
5. Review your contributions when your pay or circumstances change.

Where to Get Help

MoneyHelper offers free, impartial pensions guidance, and if you are aged 50 or over with a defined contribution pension, you can book a free Pension Wise appointment to understand your options. For personal recommendations about what to do with your pension, speak to a financial adviser regulated by the Financial Conduct Authority. Be very wary of anyone who contacts you out of the blue about your pension, offers a free pension review or promises early access, as these are common signs of a scam.

You do not need to have everything worked out today. Simply knowing what you have, and where it is, is a brilliant first step towards a more comfortable later life.