Getting started with pensions: the basics

With people living longer than ever before, it’s never been more important to start preparing for life after work.

Don’t worry if you’re not sure where to begin. With some planning, you can start on your way to creating a comfortable retirement.

Here are some basics about pensions to get you started.

What is a pension?

A pension is a tax-efficient way to build a pot of money to help fund the lifestyle you want when you stop working.

You can make regular and/or individual lump sum payments to a pension provider, who will put this money into investments, which can include equities (shares in companies) and bonds (loans to governments or companies).

A pension is an investment that can’t be accessed until at least age 55 (rising to 57 in April 2028). Your money has the potential to grow and the value of your pension pot will depend on how much is paid in and how your investments perform.

Different types of pensions

There are several different types of pensions:

Workplace pension schemes are a way of investing for your retirement through contributions deducted direct from your wages, topped up by contributions from your employer.

Personal pensions are pensions that you arrange yourself, such as NFU Mutual’s Select Pension Plan. You might choose a personal pension if you’re self-employed or to build a bigger retirement fund alongside your workplace pension.

The State Pension is a regular payment from the government most people can claim when they reach State Pension age (this age depends on when you were born). How much you get depends upon your National Insurance Contributions.

It’s important not to rely on the State Pension to keep you going in retirement. Even if you’re eligible for the full State Pension of £203.85 a week for the tax year 2023/24 (rising to £221.20 a week for the tax 2024/5), this is unlikely to provide a comfortable retirement on its own. 

Advantages of pensions

One of the benefits of a pension is tax relief on money you pay in. In other words, some of the money that would have gone to HMRC will instead go into your pension fund.

With a personal pension plan, for every £80 you invest the government will add £20. If you pay 40% or 45% income tax, you can reclaim additional tax relief direct from HMRC.

The government sets the limit, or ‘annual allowance’, on how much you can pay into your pensions each tax year and still benefit from tax relief. This is currently £60,000. If you earn less than £60,000 your allowance is 100% of your earnings.

The tax treatment of pensions depends on individual circumstances and may change in the future.

Taking money out of your pension

You can’t usually start taking money from a personal pension until you reach age 55 (rising to 57 in April 2028). You may be able to take up to 25% of the amount built up in any pension as a tax-free lump sum. Then you have some options for how you take the rest of your pension pot, including:

  • Taking all or some of it as a taxable lump sum
  • Buying an annuity, a product that gives you a guaranteed income for life
  • Leaving some of your money invested and taking income from it. This is called income drawdown.

An NFU Mutual Financial Adviser can provide more information on these and other options at retirement.

How to get started

If you'd like to open a personal pension, you'll need to find a provider that meets your needs. Other considerations include how much you’ll need and can afford to invest for retirement and how much control you’d like over your investments.

With NFU Mutual’s Select Pension Plan, you can start small and invest from as little as £50 per month. It aims to give you a flexible way to invest in a range of investment funds to accumulate a pension pot for your retirement.

If you’re not sure how to put your financial plan in place, an NFU Mutual Financial Adviser can help: call 0800 622 323.

You should be aware that the value of investments can fall and you may get back less than you invested.

NFU Mutual Financial Advisers advise on NFU Mutual products and selected products from specialist providers. When you contact us, we'll explain the advice and services we offer and the charges.

Financial advice is provided by NFU Mutual Select Investments Limited.