Bitesize: What is a pension? | Insights from the experts

Pension [pen-shuhn]

A financial product called a pension enables you to accumulate savings for your retirement. Technically speaking, it's a form of tax wrapper with limitations about how much money you can save and when you can use it.

The three main types of pensions are:

Defined contribution

Nowadays, most employer pensions are defined contribution plans. Self-Invested Personal Pensions (SIPPs) are also classed as defined contribution plans.

With this method of saving, the amount you receive upon retirement is based on contributions to your pension + investment returns - any fees paid.

Any amount you save is eligible for tax relief, therefore the government will increase your contributions. In the case of a workplace plan, your employer typically must contribute as well.

Your company will choose the supplier of workplace pensions; you will not have an option. Under automatic enrolment, you should be signed up automatically if you're aged 22 or over, under State Pension age, and earn above a set threshold with one employer. Those who aren't automatically enrolled because they don't earn enough or are below the qualifying age can typically choose to opt in.

Defined Benefit

The term "final salary" is also occasionally used to describe these. Depending on your working income and duration of service, you can determine how much you'll receive after retirement. Without having to worry about investment returns, you receive a guaranteed income for life. However, these types of pensions are becoming much rarer.

State pension

The State Pension is a qualifying benefit paid by the government. To get the full new State Pension, you generally need 35 qualifying years of National Insurance contributions (and at least 10 years to get anything at all). You can also get NI credits in some cases if you are out of work – for instance if you’re looking after small children and have claimed Child Benefit. In 2026/27, the full new State Pension is worth £241.30 a week (around £12,548 a year), having risen 4.8% in April 2026 under the triple lock.

The State Pension comes in two forms, and which one you receive depends on when you reached State Pension age:

New State Pension: reached State Pension age on or after 6 April 2016
Basic State Pension: reached State Pension age before 6 April 2016

If you do want to pick and choose your investments, you can opt for a Self-Invested Personal Pension or a provider that gives you fund choice. Prior to making an investment, make sure you are mindful of the risks involved, or contact me.

Its increases are protected by the State Pension triple lock, which raises the pension each year by the highest of inflation, average earnings growth, or 2.5%. To make the most of whichever pension you hold, see our tips on making the most of your pension, and if you've worked for several employers it's worth tracing and combining old pensions.