Pension

A pension turns money saved or earned during working life into income in retirement. There are three broad sources: a state pension paid by the government from taxes or social contributions, workplace pensions set up by employers, and personal pensions you arrange yourself. Workplace and personal pensions come in two main forms. A defined benefit pension promises a set income, usually based on salary and years of service, with the employer bearing the investment risk. A defined contribution pension builds up a pot from contributions and investment returns, and the member bears the risk of how much income it will eventually provide.

Most countries encourage pension saving with tax relief on contributions or growth, in exchange for restrictions: money is usually locked away until a minimum age set by law, and withdrawals are generally taxed as income, though in some countries part can be taken tax-free. Employer contributions are often the most valuable element, and some countries, including the UK, automatically enrol employees into a workplace scheme. For defined contribution savers, the key decisions are how much to contribute, how to invest and how to turn the pot into income, whether by buying an annuity or drawing it down gradually. Pension rules change frequently, so plans are worth reviewing regularly.