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How pensions work

What is a pension?

Pensions are long-term investments with special tax rules – for example, you get tax relief on contributions.

You can't access the money in your pension until you reach age 50, going up to 55 by 2010. Some pension schemes have additional rules about when you can take your benefits – check with your scheme provider.

You'll need to ask your pension provider when they will increase the minimum age as they can do this at any time between April 2006 and April 2010. But you no longer have to stop working to draw a pension as long as your scheme's rules let you.

How does it work?

The way your pension works will depend on the type of pension you have. There are three main types:

  • occupational salary–related schemes – offered by some employers;
  • occupational defined contribution schemes (also known as money purchase schemes) – also offered by some employers; and
  • stakeholder and personal pensions – you can start these yourself, or you may be offered a stakeholder pension or a group personal pension at work. These are also money purchase pensions.

For how each type of pension works, see Types of pensions.

Pensions at work

If your employer offers a pension scheme it's a good idea to find out what type it is and how you can join. Your employer makes all the arrangements and may even contribute to it.

Pensions you start yourself

All employers with five or more employees have to offer access to a pension scheme. If your employer doesn't offer a pension, there are lots of pension providers for you to choose from to take out your own pension. You can go to a provider direct but bear in mind that their representatives can only advise you on their company's own products, or ones they have adopted from other companies. Alternatively you can get help in choosing a pension and provider from a financial adviser.

The Pensions Advisory Service is a not–for–profit organisation that can answer your questions about any pensions – see Related links.

Use our Pension calculator to estimate the amount of pension income you could get when you retire. This is worked out from the level of regular contributions that you choose to pay into a personal or stakeholder pension. Just enter the amount you can contribute and it will calculate what your pension fund could be worth if it grows at certain rates each year.

The figures you see in the Pension calculator are estimates – they are not guaranteed. The actual pension income you receive will be affected by future changes in things like interest rates, inflation and investment growth.

You can compare personal and stakeholder pensions at Compare pensions.