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Pensions, plainlyLive demo

How a workplace pension works

In short

A workplace pension is money you and your employer put aside for later life. It works in four steps: money goes in, it is invested, it can grow, and you take it when you are older.

Step 1 of 4

Money goes in

You pay a percentage of your pay. Your employer pays in too. And tax relief adds more.

Three sources of moneyArrows from You, Your employer and Tax relief all lead into Your pension.YouYour employerTax reliefYour pension

Example

If you pay £80, basic-rate tax relief adds £20, so £100 goes into your pension.

This example assumes the scheme claims basic-rate tax relief and adds it for you (relief at source). Some schemes take your payment before tax instead, which gives the same relief a different way.

If you were automatically enrolled, at least 8% of your qualifying earnings goes in each month, and at least 3% of that comes from your employer. Many employers pay more.

What does ‘qualifying earnings’ mean?

The part of your pay between a lower and an upper limit set each tax year. Minimum pension payments are worked out on this part.

Check your understandingIf you pay £80 into your pension, how much might go in with basic-rate tax relief?

Step 2 of 4

It is invested

Your money is put into investments, so it has the chance to grow.

Where the money goesYour pension feeds a fund, which holds a mix of shares, bonds and other investments.Your pensionA funda mix of investmentsSharesBondsProperty and cash

A fund holds a mix of investments, such as shares in companies and bonds. If you do not choose a fund, your money goes into the scheme's default fund, which is designed to suit most members. You can usually choose a different fund if you prefer.

The value of investments can go down as well as up.

What does ‘default fund’ mean?

The fund your money goes into if you do not choose one. The scheme picks it to suit most members.

Check your understandingWhat happens to your money if you do not choose a fund?

Step 3 of 4

It can grow over time

Growth is added to growth, so money paid in early has the longest to build up.

Growth over timeBars for each decade get taller, and the top part of each bar, the growth, gets larger over time.Year 10Year 20Year 30Year 40

Each year, any growth is added to your pension, and the next year's growth is worked out on the bigger amount. Over many years this can make a large difference, which is why starting early, or paying a little more, can help. Growth is never guaranteed.

Check your understandingWhy can paying in earlier make a big difference?

Step 4 of 4

You take it later

When you are older, you choose how to take your money.

You can usually take your pension from age 55, rising to 57 from April 2028. Usually up to a quarter can be taken tax free, and the rest is taxed as income. You can take it as lump sums, as a regular income, or as a mix of both.

If you are 50 or over, Pension Wise from MoneyHelper offers free, impartial guidance on your options: Pension Wise on MoneyHelper.

Check your understandingFrom April 2028, what is the usual earliest age you can take a workplace pension?

Next step: see what goes in for you

Your payslip shows what you pay each month. Your pension account shows what your employer pays, where it is invested and what it is worth.

Find your pension details

In a live version this goes to the provider's secure service. This demo does not collect any details.

This is a demonstration of a concept. The information is general guidance, not personal financial advice, and any figures are made up for the example. For help with your own situation, MoneyHelper offers free, impartial guidance: moneyhelper.org.uk.

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