If you find the world of pensions confusing and overwhelming, you’re not alone.
New research published by PensionsAge has revealed that most savers don’t know how their pensions are held. Only 40% of those surveyed were aware that their retirement funds are invested in the stock market.
Yet pensions offer one of the most tax-efficient ways to save for the future. So, understanding how they work is crucial for effective financial planning.
Keep reading to learn everything you need to know to take control of your pension wealth and build the retirement lifestyle you desire.
Saving into a pension could help you build financial security in retirement
Unless you plan to work indefinitely, you’ll need to build sufficient savings and investments to cover your retirement years. With people living longer on average than previous generations, this could mean accumulating enough wealth to last 30 years or more.
While you may be entitled to a State Pension from the government (more on this later), the amount you receive is unlikely to provide a comfortable retirement on its own.
According to the Retirement Living Standards set by Pensions UK, in 2025, a single person needs £43,900 a year for a comfortable retirement, and a couple needs £60,600 between them.
Moreover, your personal circumstances and preferences may mean that you need significantly more than these estimates to fund the lifestyle you expect in retirement.
However, the full new State Pension for 2025/26 is just £11,973 a year. As such, you’re likely to need additional income streams – such as workplace and private pensions – to draw on in later life.
Different types of pensions
Depending on your circumstances, you may have (or want to consider) several types of pensions.
Your State Pension
According to figures published by Standard Life Centre for the Future of Retirement, 12.5 million adults in the UK receive the State Pension. Nearly half of pensioners rely on it to provide the majority of their retirement income.
However, entitlement to this government support is not automatic. You need 10 qualifying years on your National Insurance record to be eligible for any new State Pension. To receive the full amount, most people will need 35 qualifying years.
You can claim your State Pension when you reach your State Pension Age. In 2025/26, this is 66 for those born after 6 April 1960 (gradually rising to 67 between 2026 and 2028).
Under the triple lock agreement, the new State Pension increases each year by whichever is the highest:
- The average percentage growth in salaries across the UK
- Price inflation, measured by the Consumer Prices Index (CPI)
- 2.5%.
Read more: How much would it cost you to generate the State Pension?
Workplace Pensions
Employers are legally obliged to add all eligible workers to their pension scheme. You can choose to opt out, but it’s worth considering this carefully before doing so.
Each month, both you and your employer will pay a percentage of your salary into your pension. As a minimum, your employer must contribute 3%, while you will pay 5%, totalling 8%. You’ll also receive government tax relief on your monthly payments, further boosting your pension pot.
You can usually start drawing from your pension when you turn 55 (rising to 57 from April 2028).
There are two main types of workplace pension:
- Defined contribution (DC) or “money purchase” pension – This is the most common type of workplace pension. The contributions paid into your pension are invested by the provider. The amount available to you when you start drawing on your pension will depend on how much has been paid in, the charges made by the provider, and how well the investments have performed.
- Defined benefit (DB) or “final salary” pension – Final salary pensions are attractive to many employees as the amount you’ll receive does not depend on the performance of investments. Instead, they’re based on your salary when you retire and how long you were an active member of the scheme. However, according to The Pensions Regulator, the number of DB schemes were reduced from 7,300 in 2012 to 5,190 in 2024.
Private Pensions
If you are or have previously been self-employed, you may have private or personal pensions. Alternatively, you might have taken out this type of pension in addition to your workplace pensions to bolster your retirement savings.
Private pensions are DC schemes, and there are various types available, such as stakeholder pensions and self-invested personal pensions (SIPPs).
If you have such a pension or are interested in starting one, you may benefit from consulting a financial planner. They can explain your options and help you find the most appropriate scheme for your circumstances and retirement goals.
3 practical steps for taking control of your pension wealth now
Now that you understand why saving into pensions is important and how the different types of scheme work, it’s time to take control of your retirement savings.
Here are three steps you could take now to ensure you’re on track to achieve the retirement income you need.
1. Review your current pension wealth – Assess whether you’re on track for the retirement you expect by contacting your pension providers to check your current balance, tracking down lost pensions, and requesting a State Pension forecast. If it looks like there may be a shortfall in your pension wealth, you can take action to address it.
2. Consider increasing your contributions – One way to bolster your retirement fund is to pay more into your private or workplace pensions each month. Remember that you’ll usually receive tax relief on your contributions, and employers will also pay into your workplace scheme. Some employers may match your increased contributions, so it’s worth asking if this is an option.
3. Seek financial advice – Navigating the world of pensions can be complicated and confusing. Moreover, when you reach retirement, you’ll need to draw on your pensions carefully to ensure that you use your wealth tax-efficiently. As such, you might benefit from consulting a financial planner who can help you at all stages of retirement planning.
Get in touch
If you need help reviewing your pensions or setting up a new scheme, we can help you plan for the retirement lifestyle you want.
To learn more about working with us, please email hello@sovereign-ifa.co.uk or call us on 01454 416653.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
Approved by Best Practice IFA Group Ltd on 14/07/2025