Pensions are one of those subjects most people put off. The paperwork looks dull, retirement feels a long way away, and the jargon — auto-enrolment, qualifying years, defined contribution — does not exactly invite you in. But a pension is simply money you set aside, with help from your employer and the taxman, so that you have an income when you stop working. The earlier you understand it, the easier it is — and the less it costs you in the long run.
Here is what you need to know, decade by decade.
The State Pension: The Foundation
The state pension is the foundation of retirement income in the UK. It is paid by the government to people who reach state pension age and have built up enough qualifying years on their National Insurance record. A qualifying year is generally a year in which you paid National Insurance through work, or received National Insurance credits — for example, while caring for children or claiming certain benefits.
The full state pension currently requires around 35 qualifying years. The state pension age is currently 66 and is set to rise in the coming years. You can check your own forecast and record online through the government website, and it is worth doing: it shows how many qualifying years you have, and whether there are gaps you could fill.
The state pension alone is not designed to fund a comfortable retirement on its own. Think of it as the floor — the base layer — on top of which your workplace or personal pension builds.
Workplace Pensions: Money You Should Not Leave on the Table
If you are employed in the UK, you have probably already been enrolled in a workplace pension without realising it. Under auto-enrolment, employers must enrol eligible staff into a pension scheme and contribute to it. You can opt out, but opting out is usually a mistake, because you would be giving up free money.
Here is how it works: a percentage of your qualifying earnings goes into your pension each payday — part from you, part from your employer. The current minimum total is 8%, with at least 3% coming from your employer. On top of that, your own contributions receive tax relief, which means the government adds money too. For a basic-rate taxpayer, every £80 you put in becomes £100 in your pension.
Many employers offer more than the minimum if you contribute more yourself — for example, matching your contribution up to a certain level. If your employer offers matching, try to contribute at least enough to get the full match. Turning it down is the closest thing to turning down a pay rise.
Your 20s: Start Small, Start Now
In your 20s, retirement feels like a different lifetime, and money is usually tight. The good news is that this is exactly when small amounts matter most, because time does the heavy lifting. Money paid into a pension in your 20s has decades to grow. The same amount paid in your 40s has far less time to do the same work.
You do not need to contribute a fortune. If you are auto-enrolled, you are already building a pension. The best move in your 20s is simply to stay enrolled, and to increase your contribution a little whenever your pay rises — by one percentage point, say — so you barely notice it. If you change jobs, check what happens to your old pension pot. It stays yours, but it is easy to lose track of it. Keep the paperwork, or at least a note of the provider's name.
Your 30s: Review and Increase
Your 30s are often when life gets more expensive: a mortgage, children, childcare, maybe a bigger home. Pensions can slip down the priority list, but this is the decade to take a proper look at yours.
Start by finding out what you have. If you have had several jobs, you may have several small pension pots scattered across different providers. There is a free government pension tracing service that can help you find lost pensions — useful if you have moved house or changed your name and lost touch with an old scheme.
Next, look at how much you are contributing. A rough rule of thumb used by many advisers is to contribute a percentage of your salary equal to half your age when you started — so if you started at 30, aim for around 15% in total, including your employer's contribution. It is only a guide, not a rule, but it gives you a sense of whether you are on track. If you are well below it, consider raising your contribution by a small amount each year.
Your 40s: Get Serious Without Panicking
By your 40s, retirement is close enough to think about properly. This is the decade to move from "I have a pension somewhere" to "I know what my pension is worth and what it might pay me."
Check your state pension forecast, and check the value of each workplace pot. Most providers now show an online estimate of the income your pot might produce. If the numbers look short, you still have time to change them: increasing your contribution, working a year or two longer, or both.
One thing to resist is the temptation to cash in a pension early or to move it somewhere exotic. From age 55 (rising to 57), you can usually access a workplace pension, but taking money out early reduces what is left for later, and some of it may be taxable. If you are considering a transfer or an early withdrawal, get proper advice first — there are many scams aimed at people approaching retirement.
Common Mistakes to Avoid
A few mistakes come up again and again. The first is opting out of a workplace pension: you lose your employer's contribution and your tax relief in one move. The second is losing track of old pots — small forgotten pensions add up. The third is never looking at a pension statement. You do not need to check it monthly, but an annual glance keeps you in touch with what you have and how it is doing.
Another common mistake is assuming the default investment choice suits everyone. Most workplace schemes invest your money in a default fund. For many people that is fine, but if you are decades from retirement, you may be comfortable with a different mix. Your provider can explain the options; you do not need to become an investment expert to make a sensible choice.
A Simple First Step
If you do one thing after reading this, make it this: check your state pension forecast and your workplace pension in the same week. Write down what you have, what you are contributing, and what your employer adds. Then decide on one small improvement — staying enrolled, raising your contribution by one percent, or tracking down an old pot. Pensions reward the people who pay attention early, and the best time to start paying attention is now.