What is a pension?

• What different pension options are available
   
• How these different options work for you

Most likely, you'll have an idea of what a pension is - it's the money you live on when you finally decide to retire. But what exactly is it?

The word pension is just an easier way of describing all the tax-efficient pots of money you'll live on in older age, whether that be in savings, investments, or under the bed (worst strategy ever, by the way!). 

There are different types of pensions available. It can feel daunting to try and work out all the different options and decide which one is right for your specific needs. 

There are different types of pensions available. It can feel daunting to try and work out all the different options and decide which one is right for your specific needs. 

Once you reach retirement age, you could receive a weekly sum from the government, also known as your state pension. 

To be eligible, you'll need to have made a minimum of 10 years of National Insurance contributions to get anything at all and full payment after 35 years of contributions paid in.

Currently, you must be 66 to start claiming no matter your gender; this will rise to 67 by 2028 and to 68 between 2037 and 2039.

Make voluntary contributions: Women are more at risk of not receiving their total contribution because we are more likely to take career breaks to raise children and/or care for our loved ones. If you don't have enough years, you can make voluntary contributions.

Claim child benefits: If you take time off to raise children, you can claim child benefit, giving you National Insurance Credits until that child is 12 years old. If you work and claim child benefits, you may end up with too many National Insurance credits, which you can transfer to your partner.

Take a pension credit: If you are less well off, Pension Credit can boost your income. Pension Credit is means-tested, based on your earnings, and will top up your basic state pension. The government have a pension credit calculator you can use to determine if you're eligible.

An employer pension is also known as a workplace, employee, occupational, works, or work-based pension scheme. There are two types of employer pension:

• Defined contribution pension: You and your employer can both pay into your pension, and the pension supplier invests the money to give you a retirement income.
   
• Defined benefit pension: Your employer guarantees the amount you get and calculates it by your length of service and how much your salary is when you retire.

A private pension is one you set up and pay into - separate from an employer or state pension. You can have a private pension if you have an employer pension or not. If you're self-employed, it's a great way of making sure you're paying future you.

The majority of private pensions are defined contribution pensions - the money you pay in, and the investment performance, is what you receive. You can set up monthly contributions and/or make one-off payments into your fund, and your provider will add tax relief.

A SIPP is a so called pension wrapper. It works similarly to a private pension; however, it provides wider choice and greater flexibility on investments. You're in control of your SIPP - you can add money or change investing options at any time. Still, if you're not well versed in managing investments, it is worth having a financial advisor help.

You may choose to keep some of your pension in an ISA (individual savings account) - there are 4 types of ISAs:

• Cash ISA - Tax-free savings, you pay no tax on the interest you earn.
   
• Stocks & shares ISA - A wrapper that fits around a portfolio of investments that you pay no tax on.
   
• Innovative finance ISA - Allows you to make peer-to-peer (P2P) lending investments within a tax-free wrapper.
   
• Lifetime ISA (LISA) - Created to help first-time buyers or those saving for retirement. The government will give you a bonus worth 25% of what you pay in, up to a set limit, every tax year.