• Understand the purpose and benefit of a pension.
  • Understand the differences between a workplace pension and the state pension.
  • Understand the employer and employee contributions in a workplace pension as well as the different types of schemes.

Read time

5 mins

A pension is a long-term investment that helps you save for your retirement in a tax-efficient way.

When you pay into your pension, it's not the same as making a deposit into a savings account to earn interest. There are several unique advantages to paying money into your pension:

  • If you have a workplace pension arrangement, your employer also pays money in.
  • Pension contributions benefit from tax relief.
  • Your pension provider invests your savings on your behalf with the aim of growing your pension pot to support you in retirement.
  • The amount saved in a pension pot is not subject to tax.


Your employer can enrol you into the workplace pension scheme they have in place, or you can set up a private pension in addition to your workplace scheme, or if you are self-employed. The government also provides a state pension - though the amount you get from the state pension depends on a number of factors, such as how many qualifying years of national insurance contributions you have. For most people, relying on the state pension alone is not sufficient for the kind of retirement they are hoping for.

The value of your pension plan isn't guaranteed - it can go down as well as up, and the overall value of your plan could fall below the amount you've paid in.

Workplace pension vs state pension?

In the UK, the government provides a state pension to people who qualify. If you've made 35 years of qualifying national insurance contributions, you'll receive the maximum weekly state pension amount – which is £221.20 per week for the 2024-2025 tax year. Head to to check the age you can access your state pension.

If you're a man born before 6 April 1951 or a woman born before 6 April 1953, you're entitled to the Additional State Pension as well as the Basic State Pension.

The new state Pension age - and the amount you're entitled to - can change depending on government policy. The new state pension is currently age 66 but expected to rise to 67 in the next 4-6 years. Visit our “What is the state pension?” page to find out more.

Your workplace pension is different. You save money during your career through paying in to pension schemes your employer sets up and also contributes to.

In the UK, there's a national minimum amount that needs to be paid in to a workplace pension. The minimum amount is 8% based on:

  • 3% employer contribution
  • 5% contribution from the employee
  • This 5% employee contribution already includes 1% tax relief.


See this example:

Someone earning £30,000 a year before tax, would earn £2,500 per month before tax.

Their employer pays £75 (3%) towards their pension and the employee pays £125 (5%).

Within this £125 employee contribution, the employee only pays £100, which is topped up by £25 tax relief.


Workplace pension options

You can choose to pay in more than 5%, and your employer may also choose to pay in more than 3% - but neither of you can choose to pay in less.

If you increase your contribution your employer may increase their contribution too. Talk to your employer to find out how much they’re prepared to pay into your pension. Employers usually have a maximum % they will go up to.

You can opt out of making pension payments altogether. If you do though, you won’t receive the contribution from your employer. And you also lose the tax benefits from the government - so while you will get this extra amount of your salary as part of your monthly wages instead, you'll have to pay income tax.

Accessing pensions

You can't normally access your retirement savings before you reach the Normal Minimum Pension Age (NMPA), which is currently 55 (57 from 2028 and may increase in future), apart from in very specific circumstances like early retirement due to severe ill health.

Once you reach NMPA, you have a range of options for accessing your savings. Please see our dedicated retirement page to find out more about your choices.


Types of workplace pension

There are two main types of workplace pension with defined contribution being more common:

1. Defined contribution:

  • Your employer must set up a workplace pension for all eligible employees.
  • Unless you opt out, this pension is made up of contributions from you, your employer and tax relief from the government.
  • You can use your pension savings in a number of ways to support you in retirement, detailed on our retirement options page.
  • There is no guaranteed income or pension pot value attached to this scheme.

2. Defined benefit

  • A defined benefit pension (also known as a final salary pension) can only be provided by your employer.
  • It normally provides a guaranteed income for life (an annuity) based on how long you’ve worked for your employer and your earnings.
  • If you do not wish to buy an annuity and are willing to give up the guaranteed income, you may transfer to a defined contribution scheme which allows the other options. However if your defined benefits are worth more than £30,000 you will need to seek financial advice before being allowed to transfer to a defined contribution scheme. You'll normally be charged for any advice you receive.


For more information on different types of pension visit: Money Helper


Annual Benefits Statement

Workplace pension providers are required to provide you with an annual statement, letting you know how your savings are invested and how they have performed over the past year, along with a range of other information relating to your pension. It’s worth reading, as it contains important information that could impact your retirement.

For more information and access to tools around the basics of pensions, visit our retirement basics page.

Scottish Widows Be Money Well is committed to providing information in a way that is accessible and useful for our users. This information, however, is not in any way intended to amount to authority or advice on which reliance should be placed. You should seek professional advice as appropriate and required. Any sites, products or services named in this module are just examples of what's available. Scottish Widows does not endorse the services they provide. The information in this module was last updated on 6th April 2024.


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