Your first pension – getting started

What you’ll learn:

• How auto-enrolment rules work
• How pensions tax relief boosts your pension
• What the different types of personal pension are.

If you’re a long way from retirement, pensions may well be near the bottom of your to-do list.

After all, you’re likely to have a pile of other things to prioritise, not least paying your rent or mortgage, and covering day-to-day living expenses.

Nearly one in five people (17%) aren’t saving at all for later life, according to Scottish Widows’ latest retirement report, and could potentially face a big financial shock when they stop work. The same report found that around eight million people, equivalent to 22% of the UK population, expect they’ll never be able to afford to retire.¹

The sooner you start paying into a pension, the greater the chance you’ll be able to save enough to achieve the standard of living you’re hoping for when you retire.

Learn why with just a bit of planning today, you can boost your chances of enjoying a comfortable lifestyle tomorrow.

Your employer must sign you up to a pension

The good news is that if you’re employed, aged between 22 and State Pension age, and earn at least £10,000 a year, by law your employer must auto-enrol you into a company pension scheme.

If you don’t meet the eligibility criteria for auto-enrolment, but you earn over £6,240 a year and are aged over 16, you can still opt in to your company scheme if you want to. This means that a percentage of your salary will go into a pension each month, which is supplemented by your employer and HM Revenue & Customs paying into your pot, bumping up your total pension contributions.

Workplace pension schemes are most commonly used, which are known as ‘defined contribution’ plans, where the fortunes of your pension funds are linked to the investment performance of the funds you’re invested in. 

There’s a minimum total amount that you must pay in. In the 2023-24 tax year, you must contribute 4% and your employer 3%, with the HMRC adding a further 1%, bringing the minimum total contribution to 8%. This makes it a 50:50 scheme, with you contributing half and your employer and the HMRC the other half. You may find your employer makes more generous contributions, which will further boost the amount you end up with at retirement.

The automatic pension contribution applies to anything you earn over £6,240, up to a limit of £50,270 in the current tax year – this slice of your earnings is known as ‘qualifying earnings’. For example, if you were earning £24,000 a year, your contribution would be 5% of £17,760 (the difference between £6,240 and £24,000).

If you wish to, and can afford it, you can pay more into the pension than the 4% minimum. This additional sum can also be adjusted, stopped and started as suits you. Some employers will match any additional contributions you pay in up to a certain threshold, so it’s worth checking if yours will.

Your contributions will be boosted by tax relief

You’ll get tax relief on any pension contributions at your personal tax rate, so the more you pay in, the more you’ll get as a boost from the government.

You receive tax relief at the basic rate of 20%, so the HMRC tops up every £80 you pay in to £100. This is how your 4% auto-enrol contribution gets supplemented by 1% from the HMRC. If you’re a higher or additional rate taxpayer, you can claim back up to an extra 20% or 25% on top of this through your self-assessment tax return. 

The benefit of tax relief depends on your personal circumstances, and tax rules could change in the future. Similarly, the rules governing pension schemes might change in future too.

Types of personal pension

If you haven’t been auto-enrolled into a company pension scheme, perhaps because you’re self-employed, on a career break or are caring for family members, you can set up a personal pension. This also applies to members of company schemes who don’t wish to pay additional contributions to their workplace scheme.

There are three main types of personal pension: stakeholder pensions, standard personal pensions and self-invested personal pensions (SIPPs). The right one for you depends on how much you have to pay in, the range of investments you want to access, the costs and how much control you want to have over the underlying investments.

1. Stakeholder pensions are typically considered a low-cost option, with low and flexible contributions. However, they're likely to offer a relatively limited range of investment options.
2. A personal pension may offer a wider range of funds, with additional costs for this facility, and have minimum contributions that are higher than stakeholder pensions.
3. A SIPP is a type of personal pension that offers access to a full range of investment assets such as shares, funds, government and corporate bonds, and commercial property. You won’t be restricted to pension funds offered by a single pension provider. If you're a confident investor, you may want to pick and choose your underlying SIPP investments and monitor your pension yourself. Alternatively, you can employ a financial adviser to take on this role for an additional charge, enabling them to choose from the range of investments offered by the provider.

Don’t delay

The aim of saving into a pension is that it’ll provide you with enough income in retirement to live comfortably, but this will depend on how much you save, the performance of your investments and any charges. If you can, you need to start saving sooner rather than later, as the longer you leave it, the less time you’ll have to build up your retirement savings.

Find out how to boost your retirement income.

What you need to know

As with any investment, the value of your pension fund could fall as well as rise over time. However, the hope is that over the long-term, saving into a pension with the benefit of tax relief will far outstrip savings in cash accounts – though this can’t be guaranteed. 

You must also bear in mind that you won’t normally be able to gain access to your pension fund until you’re at least 55, with this minimum age planned to increase to 57 from 2028, and further possible increases in future. So you need to consider carefully whether you can afford to tie this money up for the long term, even if your circumstances change. If you’re not sure, seek independent advice. We don’t offer personal investment or pensions advice. 

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.