How a pension works

A pension is a pot of money you (and usually an employer or the taxman) pay into while you are working, which you then turn into an income when you are older. The earliest you can normally get at the money is age 55, and from April 2028 that rises to 57¹. When you do reach that age, you do not have to stop working, and you do not have to take the money at all: you can leave it invested, take a quarter of it tax free, buy a guaranteed income for life, or draw it out gradually².

How much you end up with depends on three things the government lists plainly: how much has been paid in, how the fund's investments have performed (they can go up or down), and how you decide to take your money³. This page explains the mechanics: the age rules, the ways to take money, what annuities are, what charges do, what happens if you leave a workplace pension alone, and how the tax works.

The minimum pension age is rising to 57

The rule that governs when you can first get at a personal or workplace pension is called the normal minimum pension age. It currently stands at 55⁸, and it is set to rise to 57 from April 2028¹. Pension Wise, the government's free guidance service, puts it simply: "The earliest you can take any of your pension money is usually age 55 (57 from April 2028)"¹. MoneyHelper says the same for personal pensions, noting the exception for people who need to retire early due to poor health².

The rise is designed to line up with the increase in the State Pension age. The minimum State Pension age is rising to 67, so the private pension access age tracks roughly ten years below it⁹. That gap matters for planning: someone who wants to retire before State Pension age will usually need their own pension or other savings to bridge the years in between.

There are exceptions. You may still be able to take your pension before the minimum age in certain circumstances, for example if you are unable to work due to ill health¹¹. Some older schemes also have protected ages written into their rules, so the exact date you can access a particular pot is worth confirming with the provider rather than assuming. The dedicated page on when you can access your pension covers the detail, and taking your pension early because of ill health explains that route.

Ways to take money from a pension pot

Once you reach the minimum age, a defined contribution pot (the kind whose value depends on what has been paid in and how investments perform) gives you several choices. You cannot take money from your pension until you are at least 55 (rising to 57 in 2028), but after that you can do so at any point¹². The main options are:

• Leave it where it is. You do not have to take anything at the minimum age. The pot stays invested and can keep growing, or falling.
• Take up to 25% tax free. You can take 25% of your pension pot tax free in one go, with any further withdrawals taxed as income⁴. Normally when you retire you take some of your pot as a tax-free cash lump sum¹³.
• Buy an annuity. A regular income for life, bought from an insurance company¹⁴.
• Go into drawdown. Your pension stays invested and you draw out income as and when you wish, taking as much as you want, with the withdrawals subject to income tax¹².
• Take it all in one go. You can take the whole pot, with 25% tax free and the rest taxed as income⁴.
• Take lump sums as you go. Each withdrawal is part tax free and part taxed⁴.

Defined benefit (final salary) schemes work differently: your pension is based on your salary and how long you have worked for your employer, and is paid as a set amount every year in retirement rather than depending on investments¹⁵. The comparison between defined benefit and defined contribution pensions sets out the differences.

Because the choice is permanent in some cases and expensive to get wrong, free guidance exists. A Pension Wise appointment can help you find out when you can access your pension pots, the different ways to take money from your pension, how each option is usually taxed, and how to spot and avoid scams¹⁶. The page on Pension Wise explains how to book.

If you have several pots from different jobs, you can also combine them by transferring. The process usually involves checking your current scheme allows transfers out, making sure you will not lose any benefits, deciding which scheme to transfer into, checking whether you need to pay for financial advice, asking your current provider for a transfer value, and asking the new scheme to start the transfer¹¹. The risks are covered under transferring pensions, and combining pots or keeping them separate weighs the choice.

Annuities: what a pension pot can buy as income

An annuity converts a pension pot into income. You can use the fund you have built up to buy an annuity, which is a regular income, payable for life, bought from a life insurance company¹⁷. Citizens Advice puts the same point plainly: "You can use your pension pot to buy an annuity from an insurance company"¹⁴.

Annuities come in more than one shape:

A level annuity pays the same income each year¹⁸, which means its buying power falls as prices rise over the years. Other types can increase each year or pay a income to a partner after you die, in exchange for a lower starting income. How much income a given pot buys depends on factors such as your age and health when you buy, and the type you choose.

Two things are worth knowing before buying. First, you do not have to accept your own pension provider's offer. It is a good idea to start by checking what your pension provider is offering, because they may still offer a higher payment, and then shop around using the open market option¹⁸. The page on annuity providers and shopping around covers this. Second, annuity income counts when benefits are calculated: if you take your pension and convert it into an annuity, the income you receive will be taken into account when your entitlement to means-tested benefits is worked out¹⁹. See how pensions affect Pension Credit and other benefits.

An annuity is not the only way to get income, and it trades flexibility for certainty. The comparison of drawdown or an annuity sets out the two side by side.

Fees and charges: why small differences add up

Running a pension is not free. The pension provider may charge you for starting and running your pension, and usually they take a percentage from your pension fund²⁰. For workplace schemes, the provider investing your pension may charge you, often an amount based on the value of the pension¹³. Government analysis puts the average at around 0.3% a year on pension pots⁵.

The reason small percentages matter is compounding. A charge of a fraction of a percent is taken from the whole fund every year, so the money you lose to charges is money that is no longer invested and growing. Over a working life of decades, the difference between a pot charged at one rate and the same pot charged at a lower rate can run into thousands of pounds. The value of a defined contribution pot can increase or decrease depending on investment returns and contributions made²¹, and charges drag on those returns every single year.

Not all pensions charge the same way. Stakeholder pensions have capped charges, lower minimum payments, fee-free transfers and usually offer a range of investment funds². Older personal pensions, particularly closed schemes, can carry higher charges than anything available new today. When comparing pots or providers, the things to check are:

• the annual charge as a percentage of the pot
• any flat fees, or charges for specific funds
• transfer-out fees
• charges for taking money out or buying an annuity through the provider

The pages on workplace pension charges and the charge cap and on personal pension and SIPP providers go into the detail. If you are weighing a transfer, the charge comparison is one part of the decision covered under transferring pensions.

Workplace pensions: what happens if you take a hands-off approach

A workplace pension is a way of saving for your retirement that is arranged by your employer⁶. A percentage of your pay is put into the pension scheme automatically every payday, and in most cases your employer also adds money into the scheme for you⁶. Some workplace pensions are called 'occupational', 'works', 'company' or 'work-based' pensions²². Being part of your workplace pension may also mean you benefit from employer contributions as well as tax relief²³.

Automatic enrolment means most employees do not have to do anything to start saving. If you are earning more than £10,000 a year, aged over 22 but under State Pension age, you will be automatically enrolled by your employer²⁴. If you are earning more than £6,240 up to £10,000 a year, aged over 16 but under 75, your employer will not automatically enrol you, but you have the right to join the pension if you want, and you and your employer will both pay into it²⁴. If you have reached State Pension age but are under 75 and earning more than £10,000 a year, your employer will not automatically enrol you, but you have the right to join if you want, with both contributing and possible tax relief²⁴. When your employer enrols you, they must write to you with the date they added you, the type of scheme and who runs it, how much they will contribute, how much you will pay in, and how you can leave²⁵. See automatic enrolment for the full rules.

The hands-off approach, in other words, works: the money goes in, the employer tops it up, and the pot grows without you doing anything. But a few things are worth knowing about what happens around the edges:

• You can opt out. You can choose to opt out of a workplace pension⁷, though you lose the employer contribution and tax relief when you do. See opting out and refunds.
• The pot is yours. Your workplace pension belongs to you, even if you leave your employer in the future⁷. When you change jobs your pension belongs to you²⁶.
• Stopping contributions does not lose the pot. If you stop paying into the scheme, you will still get that pension when you reach the pension scheme's age²⁶.
• It does not affect your State Pension. Saving into a workplace pension does not affect your entitlement to the State Pension, because your State Pension is based on your National Insurance record¹⁵.
• Time off changes contributions, not membership. On paid leave you and your employer continue making contributions, based on your actual pay during that time; on unpaid leave you may be able to make contributions if you want²⁶.

You also do not need to do anything at retirement age itself. If you have reached the age at which you can start claiming your workplace pension, you do not need to stop work in order to claim²⁷. You can claim while working as long as you have reached the age agreed with your pension provider²⁸. Many people simply leave the pot where it is.

There are protections if you take the hands-off approach. Your employer must make sure their scheme has enough money to pay employees' pensions, and cannot spend the pension fund if they have financial problems²⁹. The Pensions Regulator regulates the way workplace pension schemes are run²⁹, and you can report dishonesty or fraud in your scheme, or significant concerns about how it is being run, to the regulator³⁰. If your employer goes bust, the Pension Protection Fund may step in for defined benefit schemes. If you have a complaint, the Pensions Ombudsman can look at it.

Tax on pensions and the uncertainty over future rules

Pension tax has two halves: money going in, and money coming out.

Going in, you usually get tax relief on money you pay into a pension³. In many workplace schemes this works through a net pay arrangement: your employer takes your pension contribution and the government's contribution as tax relief from your pay before deducting tax, so you pay tax on what is left³¹. How this compares with relief at source is explained under relief at source or net pay, and the mechanics are on the pension tax relief page.

Coming out, the rules are consistent across the sources: people pay tax on payments from pensions like other income, and can access up to 25% of their pension savings tax free³². All pensions, whether scheme pensions, annuities or drawdown, are taxable in the hands of the individual as pension income at their marginal rate³³. When you get money from a pension you pay tax on any income above your tax-free Personal Allowance³⁴. Any taxable money you take from your pension will be added to your other income for that year and taxed at the relevant income tax band¹⁴, which is why taking a large withdrawal in one year can push part of it into a higher band.

The State Pension is taxable too. If you have other income from employment or pensions, HMRC will usually change your tax code so the tax due is collected from your wages or other pension³⁵. The government's Tax Confident guidance covers the practical tax matters that come with retirement, including how the State Pension counts as taxable income and managing tax while working and receiving a pension³⁶.

On the uncertainty: pension rules do change, and several changes are already legislated or announced. The minimum access age rises to 57 in April 2028¹. As announced at Autumn Budget 2025, the government is changing how salary sacrifice for pension contributions works, from April 2029³⁷. The State Pension's uprating is itself a rule that has been contested: the basic State Pension increases every year by whichever is the highest of earnings growth in Great Britain, CPI price growth in the UK, or 2.5 per cent³⁸, the mechanism known as the triple lock, announced in the June 2010 Budget³⁹. Because tax on pensions follows income tax rules, future Budgets can change how much of your pot you keep, and the value of a drawdown income is never guaranteed: as your pension remains invested, its value can rise and fall until you take the money, which means your retirement income can go down as well as up⁴⁰.

Where to get free help

You do not have to pay for guidance on your pension options. Pension Wise, the government's free service for people aged 50 and over with a defined contribution pot, covers when you can access your pots, the different ways to take money, how each option is usually taxed, and how to spot and avoid scams¹⁶. MoneyHelper provides free guidance on personal pensions and the basics of how pensions work². Citizens Advice sets out what you can do with your pension pot¹⁴, and Age UK publishes guidance on workplace pensions and annuities¹⁵.

For complaints, the Pensions Ombudsman handles disputes about workplace and personal pension schemes, and the Financial Ombudsman Service can look at complaints about pensions organised by employers²². Concerns about how a workplace scheme is being run, including dishonesty or fraud, can be reported to The Pensions Regulator³⁰. If money is tight in retirement, Pension Credit is claimed by contacting the Pension Service, and guidance for Scotland is available through mygov.scot¹⁶. The pensions section brings together the guides on each of these topics.