Good question! One that we will try to answer for you as simply as we can:
A pension is a savings scheme or plan which you use to save money for your retirement.
It is a ‘vehicle’ which you use to arrange and organise your savings towards your retirement.
The pension scheme/plan is provided by a company (your employer) or you arrange one yourself.
A pension provided by your employer is normally known as a company pension, one you organise yourself as a personal pension.
Pensions have a special tax status which means that any contributions you pay in, as an individual contribution, will attract income tax relief. This provides a significant boost to the level of contribution that you can make into a pension. For example, every £8 you save will become £10 as a result of this.
The other major feature of a pension is that it cannot normally be accessed before age 55. Pensions naturally tie your savings into your retirement. This can be viewed as an advantage because it provides a natural financial discipline.
Company pensions may well have a contribution made into the plan by your employer for you, you may also add in contributions (and get income tax relief on your contribution).
When you get to your retirement point (which will be age 55 or later, normally at a time of your choosing) with most schemes you can receive a tax free cash sum; this cash sum is likely to be 25% of the sum you have built up.
The remainder of the pension is then converted into a lifetime income. The way you take your lifetime income is flexible in respect of whether it remains level year after year or increases year on year, you can build in guarantees and/or benefits for your spouse after your death. The more benefits you build into your lifetime pension income, the lower your starting level of income.
Pension plans come in many different forms and have changed, in the way they are constructed and run, over the past few decades. Many people now use Self Invested Pensions which allow you to control the investment decisions and gain a high level of personal control over all aspects of the plan.
As a long term savings vehicle the savings or investment return you get on your money throughout the years can make the biggest difference to the eventual retirement lifetime income you will enjoy in your retirement. It is very important you seek out a pension which can maximise this long term return.
For more information on pensions please have a look at our articles and guides, drop us an email at firstname.lastname@example.org
Or call our advice line for free on 0800 772 0042
This article is non-technical, we have not covered every last individual technical point about pensions, our aim has been to help you understand the key thoughts and points, however before you take any action you need to ensure you take appropriate regulated advice.