Pensions: what you need to know

Pensions can feel complex, but understanding the basics can make a real difference to your financial future. Financial coach and author Clare Seal covers the key questions: how much to contribute, when you can retire, the tax benefits of saving into a pension, what to do with old pension pots, and more.

Pensions can be mysterious and confusing in the world of personal finance. Often disregarded as something to ‘worry about later’ until the point at which panic about not having started early enough sets in, they’re a form of saving and investing that can feel invisible and intangible. 

There’s an education and mindset shift that needs to happen when it comes to pensions and retirement savings, particularly among younger people. This can be difficult to navigate when incomes are already stretched by high living costs. But being mindful of your pension and taking advantage of the many benefits it can offer with regard to your future financial freedom and security is important at any age or stage of your career.

Here are some things you need to consider when it comes to your pension:

How much should I contribute towards my workplace* pension?

The answer to this question is personal to everyone. It depends on many factors from age to affordability. A rule of thumb that you may wish to take into account is that, if you’ve never paid into a pension before, you can take your current age and halve it to give you the percentage of your gross salary that you should contribute to afford a good standard of life in retirement – though don’t worry if this sounds like far too much. It’s just a suggestion and something to base your plans on. This figure also includes any contribution that your employer might make too.

If you’re employed, your employer must contribute a minimum of 3% of your qualifying earnings into a workplace pension (the legal minimum total is 8% combined). Some employers offer more generous contributions and it’s always worth asking about this when negotiating a new role. If your employer will match higher contributions, it’s almost always worth taking them up on it.

How much will I need to save for retirement?

Again, this is personal and will depend on your lifestyle, aspirations for retirement, housing situation and any other investments you might have. However, there are things that you can do to help you to calculate a figure to aim for.

Many pension providers have online calculators that you can use to calculate how much you’ll need – and often they’ll give you a suggestion about what to contribute each month. But do take these suggestions with a pinch of salt, as many will assume that you need to keep the same level of income in retirement as you currently have, which is not the case for everyone. For example, if you currently have a mortgage which will be paid off by the time you retire, children to care for or other expenses associated with your life stage to cover, your income requirements may be greatly different when you do eventually stop working.

One way to calculate your retirement pot is to speak to a pension advisor or financial planner. You may also be able to get a good idea of your annual income requirements by thinking about your plans and lifestyle aspirations for retirement and putting together an example of a monthly budget. Also, factor in things like travel plans, and whether you are hoping to downsize in order to release some cash from your home. 

Should I consolidate my pensions into one pot?

With so many of us changing jobs every few years, one of the most confusing decisions to make about your pension pots can be whether to keep them all separate or consolidate them into one account. Usually, when you move jobs, your new employer will set you up with a new pension account from scratch. Even if it’s with the same provider, you can end up with lots of little pots in different places throughout the course of your career. This can feel overwhelming and prevent you from being able to see the bigger picture. 

Keep hold of your pension details when you change jobs. It could be helpful to take some time every few years to review your pension pots, assess fees and returns, and make a call on whether to consolidate them into one account.

You do this by setting up a new private pension or adding them to your current workplace pension scheme. Different pension accounts have different rules about transferring in and out, and some may apply fees for transferring, so make sure that you research thoroughly before making any moves. Consolidating your pensions into one account can really help with planning and give you greater control and visibility over your financial future. It’s important to weigh up the pros and cons based on your own circumstances.

How to find old pensions

If you’ve changed jobs over the years and lost track of old pension pots, there are a few ways to track them down:

• Government Pension Tracing Service: The free official tool lets you search for contact details of workplace and personal pension schemes using your employer’s name.
• Check old payslips and employment contracts: These will often show the name of the pension provider your employer used.
• Contact old employers directly: Your former employer’s HR department should be able to tell you which pension provider was used during your time there.
• Check your post: Pension providers are required to send annual statements, so old correspondence may give you a clue.

Once you’ve tracked down your old pots, you can decide whether to leave them where they are, consolidate them into one scheme, or transfer them to a new provider. Just make sure you’re not giving up valuable benefits, such as guaranteed annuity rates or a defined benefit promise, before you transfer.

What are the tax benefits of saving into a pension?

You may wonder why we’re encouraged to pay into a workplace or personal pension to save for retirement, rather than other types of investment. The answer to this lies largely in the tax relief that you can benefit from (in addition to that employer contribution). Your pension contributions are tax-free up to either 100% of your annual earnings or £60,000, whichever is lower. You’ll then pay tax when you withdraw money from your pension, after you retire.**

Another benefit is that your workplace pension contributions may be paid as a salary sacrifice, meaning that your payments are deducted from your pre-tax salary. This can lead to a reduction in the tax and National Insurance that you pay on your salary overall, as it reduces your gross pay.

Is the State Pension taxable?

Yes - the State Pension counts as taxable income. However, the standard Personal Allowance is £12,570 so if your total annual income falls below this threshold, you do not pay any tax. But if you have other income in retirement - such as a workplace pension, private pension or earnings from work - the State Pension will count towards your total taxable income for that year.

Do you pay tax on pension withdrawals?

When you start drawing from a workplace or personal pension, the income is subject to income tax in the same way as a salary. However, you’re entitled to take up to 25% of your pension pot as a tax-free lump sum (up to a maximum of £268,275). The rest is taxable.

The amount of tax you pay depends on your total income in that tax year, so it’s worth thinking carefully about how and when you withdraw, to avoid being pushed into a higher tax band unnecessarily. A financial adviser or pension specialist can help you plan this.

Pensions for self-employed

If you’re self-employed, it’s important to make sure that you’re paying into a pension - there’s no auto-enrolment, and self-employed people in the UK are chronically underpensioned. Perhaps this is because there’s so much else to think about when running your own business, pensions get pushed to the bottom of the list.

Paying some of your profits into a pension, rather than taking them as income, can help to reduce your annual self-assessment tax bill. This is something to discuss with your accountant and a specialist pension or tax advisor. There's more information on pensions and tax on this YouGov page.

If you operate as a sole trader, setting up a SIPP (Self-Invested Personal Pension) with a provider of your choice, and paying in either a lump sum or monthly amount, is a great place to start. If you operate as a limited company, you may be able to set up a workplace pension through your company – speak to your accountant and/or a tax advisor about the best way to go about this.

When can I retire and access my pension?

The current State Pension age is 66 for both men and women. It’s confirmed to rise to 67 between 2026 and 2028, and the government has proposed a further rise to 68, though the timetable for this is still under review.

It’s worth bearing in mind that the earlier you start withdrawing from your pension, the longer the money you’ve saved potentially has to last. So do think carefully about when you’d like to retire. You may be able to withdraw from your pension early due to exceptional circumstances, such as ill health or a disability, but this is at the discretion of individual providers.

You can start claiming your State Pension*, which is set at a statutory amount, from your State Pension age. You can check your personal State Pension age and forecast using the gov.uk State Pension checker.

What happens to my pension when I die?

What happens to your pension when you die depends on the type of pension you have and your age at the time.

Defined contribution pensions

If you die before drawing your pension, the pot can usually be passed on to whoever you nominate as your beneficiary - this is done through an ‘expression of wishes’ or nomination form, which you should fill in with your pension provider. The money typically falls outside your estate for inheritance tax purposes, though this is set to change from April 2027.

If you die after you’ve started drawing your pension, what’s left depends on how you’re taking the income. If you’re using drawdown, any remaining pot can still be passed on. If you’ve bought an annuity, it depends on the terms - some have a guarantee period or spouse’s pension built in.

Defined benefit pensions

Defined benefit pensions typically pay a reduced income (often 50%) to a surviving spouse or civil partner. Some schemes also include a lump sum payment on death. The specific terms vary between schemes, so it’s worth checking your scheme rules.

Inheritance tax and pensions

Currently, pensions sit outside your estate for inheritance tax purposes, which makes them a useful tool for passing wealth to the next generation. However, from April 2027, unused pension wealth is expected to be brought into the scope of inheritance tax. This is a significant change that affects how pensions fit into estate planning - it’s worth speaking to a financial adviser if this is relevant to your circumstances.

The State Pension

The State Pension doesn’t pass on in the same way as a private pension. However, a surviving spouse or civil partner may be able to inherit some or all of their late partner’s State Pension entitlement, depending on when both partners reached State Pension age. Check gov.uk for the rules that apply to your specific situation.

Expert thoughts on pensions from Smart Money People

Pensions are one of those financial topics that people consistently put off engaging with, and it’s understandable. The rules can feel complex and the payoff seems distant. But the reality is that the earlier you engage with your pension, the more options you have and the less work it takes to build a meaningful retirement income.

One of the most impactful things anyone can do today is to check their pension forecast on gov.uk, look up whether they have any old pension pots using the Pension Tracing Service, and find out whether their employer offers matching contributions above the minimum. These three steps take less than an hour and can have a significant impact on retirement outcomes.

For self-employed people, the importance of acting sooner rather than later is even more acute. There’s no employer contributing on your behalf, no auto-enrolment to default into and no nudge from payroll. Setting up a pension and automating a regular contribution is one of the highest-value financial decisions a self-employed person can make.

* A State Pension and your workplace pension are two different pension schemes. The State Pension is provided by the Government and a workplace pension is provided by your employer. You receive a State Pension income based on your National Insurance contributions. You can receive both the State Pension and a workplace pension once you hit retirement age.

** This information is correct at the time of publishing (March 2026).