What is a pension and how does it work?

A pension is a long-term way of saving for retirement, with tax relief on money paid in and limits on when it can be taken out. In the UK there are three main kinds: workplace pensions, personal pensions (including SIPPs) and the State Pension.

Pension annual allowance: £60,000; Most that can be paid into all your pensions in a tax year before a tax charge. Tax relief is also limited to 100% of your earnings.; HMRC: Pension schemes rates and allowances
Basic-rate pension tax relief (relief at source): 20%; Your provider claims it from the government and adds it to your pot: £80 paid in becomes £100. Higher and additional-rate taxpayers can claim more.; GOV.UK: Pension tax relief
Minimum age to take a private pension: 55; The normal minimum pension age, until 05/04/2028. Scheme rules can set a later age.; legislation.gov.uk: Finance Act 2022, section 10 (increase of normal minimum pension age)
Full new State Pension: £241.30 a week; For people who reach State Pension age on or after 06/04/2016. The amount you get depends on your National Insurance record.; GOV.UK: The new State Pension: what you’ll get

Tax year 2026/27. Checked 22/09/2026.

What a pension is

A pension is money set aside for later life. The government usually adds tax relief to what you pay in, and in return the money normally cannot be taken out until you reach a minimum age. That age is 55 now and rises to 57 on 06/04/2028.

You can pay into as many pension schemes as you like, within the tax limits.

The three main kinds

Workplace pension: arranged by your employer. Employers must automatically enrol eligible staff, and usually both you and your employer pay in.
Personal pension: one you arrange yourself with a pension provider. Types include stakeholder pensions (which must meet government standards such as limits on charges) and self-invested personal pensions (SIPPs), which let you choose the investments.
State Pension: a regular payment from the government from State Pension age, based on your National Insurance record. The full new State Pension is £241.30 a week in 2026/27.

Defined contribution and defined benefit

Defined contribution (also called “money purchase”) pensions build up a pot. What you get depends on how much is paid in, how the investments perform and how you take the money. The pot can go down as well as up.

Defined benefit pensions, usually workplace schemes described as “final salary” or “career average”, promise an income based on the scheme’s rules, such as your salary and how long you worked there. The employer is responsible for making sure there is enough money to pay it.

Tax on the way in and on the way out

On the way in: contributions usually get tax relief up to 100% of your earnings (or £3,600 a year if you have little or no earnings), and up to the £60,000 annual allowance for 2026/27.

On the way out: you can usually take up to 25% of a pension tax-free, up to a total of £268,275 across all your pensions (the lump sum allowance). The rest is taxed as income, alongside any other income you have that year. Taking a large amount in one year can mean paying a higher rate of tax.

Taking money from a defined contribution pot

The main options are taking some or all of it as cash, buying an annuity (a product that pays a guaranteed income, often for life), or moving it into flexi-access drawdown (keeping it invested and taking an adjustable income). Providers do not have to offer every option; a pension can be transferred to another provider that does.

How pensions are protected

Defined contribution pensions are usually run by pension providers, not employers, so the pot does not disappear if your employer goes bust. If an FCA-authorised provider fails and cannot pay, the FSCS may pay compensation.

For defined benefit schemes, the Pension Protection Fund usually pays 100% compensation if you have reached the scheme’s pension age when the employer fails, and 90% if you have not.

Changes already confirmed or announced

Minimum pension age: rises from 55 to 57 on 06/04/2028 (Finance Act 2022).
Inheritance Tax: from 06/04/2027 most unused pension funds and death benefits will count as part of a person’s estate for Inheritance Tax. Death in service benefits from a registered pension scheme are excluded. This is in the Finance Act 2026.
Salary sacrifice: the government announced at Budget 2025 that from 06/04/2029 National Insurance will be charged on pension contributions made through salary sacrifice above £2,000 a year. The legislation has not yet been made.

Free help

Pension Wise, part of MoneyHelper, offers a free appointment to people over 50 to talk through the options for defined contribution pensions (it does not cover the State Pension or defined benefit pensions). The Pension Tracing Service can help find pensions you have lost track of. A regulated financial adviser can give personal advice for a fee.

Pension investments can fall as well as rise. Tax treatment depends on individual circumstances and tax rules can change.

Questions people ask

›What is the difference between a workplace pension and a personal pension?

A workplace pension is set up by your employer, who usually pays in too. A personal pension is one you set up yourself with a provider; employers can also use personal pensions as their workplace scheme.

›When can I take money from my pension?

From 55 for most private pensions, rising to 57 on 06/04/2028, unless you retire early through ill health or have a protected pension age. Scheme rules can set a later age. The State Pension has its own, separate State Pension age.

›How much of my pension can I take tax-free?

Usually up to 25% of each pension, up to a total of £268,275 across all your pensions unless you hold a protected allowance. The rest is taxed as income.

›How do I find a pension I have lost track of?

The government’s Pension Tracing Service can find contact details for workplace and personal pension schemes you may have paid into.

›Is my pension protected if the provider fails?

For defined contribution pensions with an FCA-authorised provider, the FSCS may pay compensation. Defined benefit schemes are usually covered by the Pension Protection Fund if the employer fails.

Related guides

Sources

This is information, not advice. Tax treatment depends on your circumstances and can change. For free, impartial guidance, MoneyHelper (backed by the government) can help; for a personal recommendation, speak to a regulated financial adviser.