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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.

The government is planning changes that will mean all employers will have to offer and contribute to a pension in future. Employers who haven't offered an occupational pension in the past may set up their own scheme, or may pay pensions into a new central scheme that is being set up. This is expected from 2012. The Pensions Advisory Service website has more information – see Related links.

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.

You can compare personal and stakeholder pensions at Compare pensions.