How does your pension work?

In your 20s, retirement can seem a long way away. There are often more immediate concerns, like rising rents, the cost of living, and getting on the property ladder. But saving even a little more now could make a big difference to the value of your pension pot when the time comes to retire - and the kind of lifestyle you get to enjoy.

There are also lots of financial incentives to saving, particularly when it comes to workplace pensions. For instance, your employer usually has to pay in as well, which means free money that you would otherwise lose out on. You’ll also get tax relief from the government, meaning your savings are boosted from day one.

What is a defined contribution pension?

Most workplace pensions are defined contribution, where the money you get in retirement is decided by how much you pay in and how this money grows as it’s invested over time. Pensions are long-term savings, and you will typically be invested in a default fund that is managed differently as you get closer to retirement. While all investments can rise and fall in value over time, your fund aims to ride out the volatility and benefit from cumulative investment returns.

What is auto-enrolment?

Most workers in the UK must be auto-enrolled into a pension, where you save at least 8% of your salary, made up of payments from you, tax relief and employer contributions. To qualify, you need to be over 22 and earn more than £10,000 a year.

If you earn between £6,240 and £10,000, you can ask to join and you’ll get employer contributions. If you earn less – your employer must let you access the scheme, but they don’t need to pay in. You will still get tax relief in both cases.

It is possible to opt out of auto-enrolment, but if you choose to, you’ll lose the employer contributions, and tax relief benefits of savings into a workplace pension. You may also find that you don’t have enough savings to enjoy a comfortable lifestyle when you retire.

How does tax relief work?

Everyone in the UK gets tax relief on the money they pay into their pension, up to the value of their annual earnings. How much tax relief depends on how much income tax you pay. For most people, that’s 20%, but higher rate tax payers get 40% relief and additional ratepayers get 45%.

Employer contributions

Many employers will contribute more in to your workplace pension if you pay in more – something often referred to as “matching”. The levels and limits vary by business, so check with HR to see what’s available. You only get this boost if you pay more.

You can also find out about your employer contributions by logging in to your Retirement Savings Account. Once you’ve logged in, click on the ‘Your TPT DC pension’ pod and then click on the ‘change contributions’ tab at the bottom of the page.

How much do I need to save?

On average, we spend a third of our lives in retirement. The current state pension pays less than £10,000 a year, so any extra income you need on top of that will need to be funded by you.

Our PLSA retirement living standards page has a short quiz to help you figure out what kind of lifestyle you want in later life, and what you’ll need to save to achieve it. You can compare this to your current savings value and see if you’re on track.


You can check this within your online Retirement Savings Account. You’ll see how much you’re contributing, your current fund value and how your money is invested. It’s a good idea to check this at least annually to make sure you’re on track with your savings goals.