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Benefits when you are contributing: tax relief and employer contributions

If you put £1 in a savings account, that’s all that goes in. For every £1 you put in a pension, more than £1 goes into your pot.

This is because when you put money in to a pension you get tax relief on all your contributions, up to an annual limit. This means that for every bit of money you put in, you get a bit back from the government as well.

If you have a workplace pension scheme your employer may also make a contribution. Added to the money you put in, this boosts the amount you are saving for the future.

• Tax relief on pension contributions

• Company pensions

Example: a company pension scheme

Here is an example of how this can work in a money purchase company scheme:

• Sonya puts £40 a month of her pay into her company pension scheme
• Sonya's pension contribution reduces her taxable pay so pays less tax on her total pay (as a basic rate tax payer Sonya's tax bill is reduced by £8 - this means her £40 contribution only cost her £32)
• Sonya’s employer puts in another £40 every month
  
• so the total going into Sonya’s pension pot each month is over £80
  

Benefits while you are building up your fund

With a savings account the growth of your money is fixed to an interest rate. With a pension, the growth could be much higher.

In a personal pension and in money purchase company pensions, your pension pot is invested in stocks and shares or some other type of investment. There is risk involved, but generally your pot will grow over time and you are likely to get a bigger pension in the long term.

• Risks of a company or personal pension

Benefits when you take your money

With a savings account you have control over your money and you can usually access it immediately or after a short notice period. Once you have spent it, though, the money’s gone.

A pension is designed to give you a regular income for the rest of your life – and sometimes, when you die, for your dependents too. So you do not need to worry about the money being ‘used up’.

Once you decide to take your money, some pensions also give you the option to take a tax free lump sum.

Depending on the scheme, this could be either:

• an amount related to your salary
• part of the fund you've built up at the point you retire

Because this means taking some of your fund as cash, you would get a lower amount of regular income.

• Options when you take your company pension

• Options when you take your personal pension

What happens to your money if you die

When you first set up your pension you name a beneficiary. This is somebody who you would like to get the money if you die. If you die before you start claiming your pension they will get one of the following:

• a lump sum
• a refund of all the contributions you have made
• a regular income, which may include an amount for dependent children

If you die after you start claiming your pension, what they'll get depends on what type of pension you have and what the rules are.

• What happens to a company pension when you die

If you stop contributing or lose or change your job

If you stop contributing to your pension, your money won’t disappear. You will still be a member of the scheme. You will probably still see your pot grow and so will still get the value of it when you decide to start drawing.

In some company schemes it is possible to opt out for a certain length of time. If you do this, it is possible that your employer will carry on contributing.

In most cases, you will also have the option of transferring an old pension that you have stopped contributing to into a new pension fund.

You might choose to do this if you have changed jobs. You should seek independent financial advice if you are planning to do this.

Whatever happens, the money you’ve built up won’t disappear.

More useful links

• Pensions - an overview

• Pensions planning when you're starting out

Useful contacts

• The Pensions Advisory Service (TPAS)