A pension scheme is a type of long-term savings plan. It also serves as a tax-efficient form of savings during your working career.

You are essentially required to save some of your income regularly, typically each month, during your working life. These savings will later provide for your income once you retire.

The most significant incentive of opting into a pension scheme is that you do not pay any tax on your contributions – making it the most sensible way to prepare for your retirement. It is thus the best way to save for the years once you are no longer working regularly.

What are the Different Types of Pensions?

There are three main types of pensions – all of which are available to those currently in employment. These include the following:

• State pensions

The state pension in the UK is currently between 61 and 61 for women and 65 years old. Once you reach the specified age, you may be entitled to a regular income from the Government in the form of a state pension.

In order to claim the state pension, you will need to have made National Insurance contributions throughout your working life. The amount that you will then receive is dependent on the number of years that you have made these contributions.

• Workplace pensions

In addition to the workplace pension, most UK citizens will need to boost their income by taking out a pension with their employer.

A workplace pension will take contributions from the worker, their employer and the Government. This will then provide an income once you retire. These pension payments are typically taken out as a chunk of your salary each month. This chunk is then supported by contributions from your employer too.

• Personal pensions

Personal pensions operate similarly to workplace pensions.

With personal pensions, you will not receive contributions from your employer. Instead, you choose your own pension provider which may in fact offer fees or investments that suit your needs better than that from your employer’s pension scheme.

Typically, personal pensions will suit those who are self-employed or freelance.

Why Do I Need a Pension?

You will need some kind of a kension to support yourself when you are no longer working.

Without the provisions laid out by a pension scheme, you may have to rely on state payouts which do not allow for the ‘ideal’ retirement.

At some points in your life, you may have to reassess your pension contributions against other significant factors in your life, such as approaching buying or improving a property. Furthermore, with house prices and energy bills on the rise, you will need to consider this for your future years.

It is further important to note that you can accumulate a tax-free cash sum on your retirement through a pension scheme, as well as it acting as a form of life assurance for your dependents.

As such, if you are considering contributing towards a pension scheme, then the earlier that you start saving the better. This will allow you to reap the greatest benefits from the compounding returns.

If you are considering starting a pension, the earlier you start saving the better, as you will get even greater benefit from the compounding returns. In addition to a pension scheme, it is also worth pursuing alternatives alongside it. These could include investments, savings accounts such as cash or lifetime ISAs, as well as trying to invest in some form of property.