If you are employed you may be offered membership of your employer’s workplace pension scheme.
It is likely that you will need to pay contributions and these will be deducted from your salary and paid into the scheme by your employer. Your employer is likely to contribute to the scheme too, to add to your savings. The contributions are invested until you retire.
You may be covered by the automatic enrollment rules, which started in October 2012. The earliest you can open your pension pot is usually age 55, unless you are retiring because you are suffering from ill health or if your pension scheme allows for retirement before age 55. You will be able to take some as a cash lump sum, and the rest in the form of a pension.
If you are self-employed, you can set up a pension yourself with a provider. Providers include insurance companies, banks, building societies, and some high street shops. You can also set up a pension yourself as well as or instead of being in your workplace pension scheme.
Saving for your retirement through a pension scheme has certain advantages over saving in other ways, including:
- tax relief on your contributions;
- investment growth which is free of tax; and
- the ability to take some of your benefits at retirement as a cash lump sum.
When you take your pension, it will be taxed in the same way as your salary – that is under the pay as you earn system.
You cannot take out the money you put into your pension arrangement and use it for another purpose, because the purpose of the scheme is to give you an income in retirement. It can only be transferred to another pension scheme, or used to provide your benefits at retirement or death.