How a pension works
Here is our easy to follow guide on how a pension works in the UK.
You pay an amount each month in to a pension. The UK government
will add the basic rate of tax to your contribution each month.
For example, if you pay in £100 per month the government will
add 22% to make this £122 per month. Higher rate tax payers
get a refund in their tax code for all tax above 22%.
The pension company invest your monthly payments and estimate a return.
You keep paying this until you retire and usually you increase the payments
every year due to inflation.
When you retire you will have a pension pot. This is basically all
your payments + the payments from the government + the growth from
the pension company. This pot of cash is then sold to another company
who will pay you a percentage per year until you die.
The company who buys your pot does well if you die soon and can loose
out if you live a long time. The percentage they pay you each year
will depend on the age you retire. So if you retire at 55 they will
pay you less than 65 as they assume you will live longer.