Pension basics

Last updated: 06 Oct 2026

Workplace pensions are an important part of your pay package as they are deferred pay. However they are also the part that is often the least understood. Studies have shown that a lack of understanding contributes to poor decision-making when it comes to pensions, so here are some pension basics.

Why do I need a pension?

Occupational pension schemes are designed to help you save money during your working life so that you can live on the money during your retirement.

The State Pension only provides a basic level of income that will be insufficient to meet the standard of living that we typically want to enjoy in our retirement.

It can be challenging to afford to save for your retirement however saving into an occupational pension scheme has tax advantages and employer contributions.

[top]

Pensions terminology explained

With its technical terms and acronyms, the pensions world can seem daunting. But fear not – our list aims to help you understand the key pension terms you are likely to encounter.

Key terms workplace pensions

Annual Allowance

The annual limit (tax year since 2016/17) of pension contributions or growth for the purposes of limiting pension tax relief. The current standard allowance is £40,000. A Tapered Annual Allowance is applicable for high earners. Contributions from employees in defined contribution schemes are assessed against the allowance. Defined benefit pension growth is assessed against the allowance.

Automatic enrolment

This is a government policy that compels all employers to enrol all qualifying employees into a pension scheme. Employees are free to opt out and have to be enrolled again every three years.

Defined benefit (DB)

Where the amount you’re paid is based on how many years you’ve worked for your employer, the salary you’ve earned and a pre-agreed accrual rate (this is a fraction of your salary, historically a 1/60 or 1/80, that is multiplied by the number of years you worked to determine your pension). This type of pension pays out a secure income for life, which increases each year.

Defined contribution/money purchase

Where your monthly pension contributions buy units in a fund, which fluctuates daily, the final amount is not guaranteed. The accumulation of these units is commonly referred to as your pension pot.

At retirement age, members traditionally exchange this for an income for life by buying an annuity. Draw down is also available to access funds from the pension pot from minimum pension age.

Independent Financial Adviser (IFA)

Financial advice is a regulated activity under the Financial Services and Markets Act 2000. Independent financial advisers who are authorised and regulated by the Financial Conduct Authority are permitted to provide personalised financial advice.

Lifetime Allowance (LTA)

The lifetime limit individuals are allowed in pension savings with the purpose of limiting pension tax relief. The 2018/19 LTA is £1,030,000.

Pensions tax relief

Payments to pensions and pension growth are tax exempt, within certain limits. Pension contributions paid via payroll receive tax relief via net pay (workplace pensions). Contributions paid directly into a pension scheme receive relief at source (personal pensions).

[top]

What is a defined contribution (DC) pension scheme?

Defined contribution (DC) – where your monthly pension contributions buy units in a fund, which fluctuates daily, so the final amount is not guaranteed. The accumulation of these units is commonly referred to as your ‘pension pot’. At retirement age, members traditionally exchange this for an income for life by buying an annuity. These are also known as Money Purchase Pensions.

For more detailed explanations of pension types, visit the Money and Pensions Service website.

Risk

While the risk of investment performance and life expectancy falls on employers in defined benefit schemes, it falls on individuals in defined contribution schemes. The level of the employer and employee contributions to this type of pension is extremely important.

[top]

What is a defined benefit (DB) pension scheme?

Here, the amount you’re paid is based on how many years you’ve worked for your employer, the salary you’ve earned and a pre-agreed accrual rate (this is a fraction of your salary, historically a 1/60 or 1/80, that is multiplied by the number of years you worked to determine your pension). This type of pension pays out a secure income for life, which increases annually in line with inflation.

Two types of defined benefit pensions

Final salary

A final salary scheme uses the accrual rate and your final salary before you retire to determine your retirement pension income.

Career Average Revaluated Earnings (CARE)

This uses the accrual rate against your salary in each tax year you work to determine the amount you will be paid in retirement. The pension accrued in each tax year is re-evaluated annually in line with inflation.

For more detailed explanations of pension types, visit the Money and Pensions Service website.

Risk

Defined benefit schemes are commonly referred to as ‘gold-plated’ pensions. This is because they provide a guaranteed, index linked income in retirement.

That guarantee means that the risk with this type of pensions lies with the sponsoring employer. Should the employer and employee contributions invested not meet the expected returns, the employer has to make up the shortfall.

Not only that, if the benefits paid out by this type of pension are higher than expected (due to increasing life expectancy for example), the extra funding also has to come from the employer.

As a result, many defined benefit schemes are in deficit and have recovery plans in place for sponsoring employers to make up the shortfall in the scheme.

If an employer becomes insolvent and has a shortfall in the funding of the pension scheme, the Pension Protection Fund provides a safety net.

[top]

How much do I have to contribute to my workplace pension?

The only guaranteed income most young people in the private sector will have in retirement is the State Pension. The full weekly rate for the new State Pension is £221.20 (April 2024) and is only designed to keep pensioners above the poverty line.

Pensions professionals advise members of defined contribution schemes to save between 15% and 20% of their salaries into pensions to achieve a comfortable income in retirement.

The Money Advice Service’s pensions calculator is a good resource to estimate an appropriate amount you should save. (Please note there are other calculators that are available).

This sounds like a large amount, but pension tax relief and contributions from your employer mean it can be achieved.

Standard rate taxpayers will receive 20p of pensions tax relief paid into their pension for every 80p they contribute. Employers will also make contributions to your pension if you are enrolled in a workplace pension scheme.

Typically employers’ contributions increase the more you pay, up to a maximum limit. We recommend that members review the structure of employee and employer contributions to see if increasing their contribution could increase the amount their employer pays.

Bectu negotiators work hard to ensure that members enjoy an above average employer contribution.

[top]

Should I combine my different pension pots?

Prospect and Bectu members are increasingly finding that they have many pension pots from different providers and are wondering whether it makes sense to try to combine them. Our Pensions Officer Neil Walsh  takes a look at some of the factors that you’ll need to consider.

Broadly, we’ll consider the following areas in turn:

Increase in number of pension pots due to automatic enrolment

This situation has been driven by the introduction of automatic enrolment between 2012 and 2019.

This required employers to make pension contributions on behalf of eligible employees and workers. Over 10 million people have since been automatically enrolled into pension schemes.

The impact has been mostly felt in the private sector, where many employers or engagers did not previously contribute to pension schemes on behalf of employees or workers.

In these areas, the most common type of pension scheme offered are called defined contribution pension schemes.

These schemes are essentially pots of money that members and employers pay into. Members may also benefit from tax relief and National Insurance savings (if salary exchange operates).

The pension pots are invested in a range of different assets that are offered by the pension provider, such as UK and international equities; government and corporate bonds etc.

These pension pots grow over time and, at retirement, the member can use the accumulated value across all their pots to secure income for the rest of their life.

It should be noted that each employer or engager picks the pension provider for the period of time that you work for them.

This restricts your ability to consolidate pension pots simply by choosing to have your contributions paid to an existing pot you had already set up.

Since automatic enrolment started, you only have to be a member of a defined contribution pension scheme for one month to keep the accumulated pension pot with a provider.

All the above factors have led to a situation where more and more Prospect and Bectu members have increasing numbers of pension pots, and now face questions about how to manage them.

How to find lost pension pots

In the extreme, it is very easy to completely lose track of a small pension pot that you had in relation to a short-term engagement (maybe one that was in addition to your usual work).

As the number of total pension pots begins to soar, the number that members lose track of will naturally grow too.

You can use the Pension Tracing Service to find any pension pots you may have forgotten about, or otherwise lost track of in the past.

Why it can be a good idea to consolidate your pension pots

A useful starting point to the question of what to do with different pension pots, is to acknowledge the good reasons there can be for combining them (but make sure you also read the warnings!)

Some of the main reasons are summarised here (and explained in more detail below – please note that not all the reasons carry the same weight).

Four reasons to consolidate your pension pots

  1. Potential to lower the charges that you pay
  2. Easier to plan for your retirement
  3. Improvements in technology and investment approaches
  4. Potential for better value when using pension pots to secure retirement income

1. Potential to lower the charges that you pay

The amount of charges that are deducted from your pension pot obviously has a direct impact on the value of funds that are then left for you to use to secure income in retirement.

It’s not generally possible to predict which provider will produce the best investment returns over time (indeed, it should be possible to replicate similar strategies / returns with different providers).

But one thing you can control is the amount of funds that providers deduct from your pension pot in the form of charges.

Providers’ charges can be expressed in a number of different ways (eg as a single percentage of the pot value, as a combination of a percentage of the pot value and a different percentage of each new contribution made or as a combination of a percentage of the pot value and a monthly or annual flat fee).

Small differences may not seem significant, but a reduction of even 0.1% in the percentage of the pot value could result in your pot being thousands of pounds higher when you retire.

There is a statutory cap on charges that apply to the default arrangement for pensions schemes used for automatic enrolment. The charge cap is 0.75% of the funds under management (equivalent caps apply for schemes that have a combined charging structure).

Large schemes used for automatic enrolment can often offer charges that are much lower than the cap. Many Prospect and Bectu members are in schemes with charges as low as 0.3%.

If you have legacy pension pots with relatively high charges (maybe because it was started before the charge cap was introduced or it was a personal arrangement which often have higher charges) then you can potentially benefit by consolidating these into a pot with lower charges.

Conversely, if you have a previous pension pot with very low charges but the scheme offered through your current employer is more expensive, then you are unlikely to benefit from transferring that pot into your current one.

Many Prospect and Bectu members, particularly those who work on a series of shorter-term contracts, will have come across NEST. NEST was established by the government as part of automatic enrolment; it has a legal obligation to let any employer or engager who needs to, offer it as a pension provider to their employees and workers. If you have a NEST account it is worth noting that currently the annual charges for any pension pot you transfer into it are 0.3%. This means there is a low-cost consolidation option available to many people.

2. Easier to plan for your retirement

The brutal reality is that the legal minimum level of pension provision required under automatic enrolment is unlikely to allow most people to retire at a reasonable age with a comfortable standard of living.

Thankfully, many Prospect and Bectu members have access to pension schemes that are much better than the statutory minimum, but this will not be the case for all.

Whatever the quality of pension provision offered to you, it is important to have at least a high-level plan for retirement (ie an idea of when you would like to retire and how much income you would need then to maintain a comfortable standard of living.)

It is also important to monitor how your pension savings are performing against this high-level retirement plan. If you have many different pension pots with lots of providers, then this process becomes much more difficult.

If unnecessary complexity delays, or even prevents, you from reviewing the level of your pension savings, this could impact when you get around to taking action to improve your retirement outcomes.

For this reason, greater consolidation can lead to easier retirement planning and better outcomes as a result.

Consolidation can also help you ensure that important administrative issues are up-to-date and consistent (eg that all the pots have the same target retirement age and the appropriated nominated beneficiary for any death benefits.)

It’s also easier to ensure you have a consistent overall investment strategy across your all your pension savings if you have consolidated your pension pots.

3. Improvements in technology and investment approaches

A pension product is a long-term investment, you might be a customer of a provider for many decades. There is a lot of innovation in the pension industry over time. It may be that some older pension pots do not have all of the features that newer providers can offer.

Consolidating your pots can help ensure that you do not miss out on new developments. These could take the form of new technology and interfaces that help you access and interpret information about your savings or investment options that were not previously available.

4. Can you get a cheaper pension?

We save into pension pots in order to provide an income throughout our retirement. Previously, the most common way to do that was to use the pension pot to buy a series of regular payments (ie a pension – called an annuity) from a pension company.

Buying an annuity is not as common now as it was. A big reason for this is that annuities became very expensive, people questioned their value. The government also relaxed the rules about what you could do with your pension pot, so many people were free not to buy an annuity any more.

But annuity prices have improved more recently, and many people feel the need to have a degree of certainty about the level of income they can rely on from a certain point of their retirement. So they are coming back into fashion of a sort.

If you are buying an annuity, you might find that providers offer incentives for larger transactions. One £100,000 pot might be offered a better rate than two £50,000 ones. For this reason, it can be worthwhile to consolidate your pension pots before you use them to secure income in retirement.

Reasons to be wary of consolidating your pension pots

The previous section covered the potential advantages from consolidating past pension pots with a single (or just fewer!) providers.

But there are certain features of pension pots that can be particularly advantageous. There is a risk that they could be lost if you transfer the funds to another pot.

It is important to check whether these features apply to any of your pots and whether they are worth retaining.

These features are summarised here (and explained in more detail below.)

Four features to look out for before transferring a pension pot

  1. Loss of guaranteed annuity rates
  2. Loss of the tax benefits associated with small pots
  3. Loss of the tax benefits associated with older pension pots
  4. Exit fees

1. Loss of guaranteed annuity rates

Annuities were described in the previous section. They are the regular pension income you can get throughout retirement in return for a lump sum paid to a provider.

In the past some pension pots came with a guaranteed annuity rate (GAR). This meant that the provider gave you fixed terms for the future pension income that your pension pot could buy.

Over the years, annuities have become a lot more expensive. More expensive than providers expected they would be.

This has made some of the rates previously guaranteed look very generous today compared to the rates available on the open market.

If you took the funds out of a pot that came with a GAR, you will lose the right to take advantage of that rate and could end up with a much worse outcome.

GARs were a legacy feature of older pension pots. It is definitely worth checking whether any pot had a GAR before transferring it to another and potentially losing it.

2. Loss of the tax benefits associated with small pots (under £10,000)

There are two potential tax benefits associated with small pension pots (ie under £10,000) that you could lose if you consolidated them into a bigger pot.

These benefits may not affect huge numbers of members, but they could be quite significant to those people that are impacted.

Money Purchase Annual Allowance

You can normally save up to £40,000 in your pension pots in a tax-year. This is usually enough to cover the vast majority of savers (even those in very generous workplace schemes.)

But after you first take cash out of a pension pot (beyond the 25% that is tax-free) you can be restricted to a lower limit of £4,000 (called the Money Purchase Annual Allowance.)

This lower amount might be less than what your employer will pay into your workplace scheme, so it can be quite restrictive and potentially prevent you from being able to access pension pots while still working (because of this restriction on how much you could save afterwards.)

However, you can cash in up to three personal pension pots (and an unlimited number of workplace pension pots) worth up to £10,000 without triggering the Money Purchase Annual Allowance.

Consequently, it could be advantageous to keep a small pension pot separate so that you can access it while still working without triggering this lower limit for future pension savings.

Lifetime Allowance

If you have a lot of pension savings, you might be impacted by the Lifetime Allowance (currently £1,073,100.) Savings in excess of this amount may be subjected to a charge.

You can cash in up to three personal pension pots (and an unlimited number of workplace pension pots) worth up to £10,000 without using up any of your Lifetime Allowance.

Consequently, your tax liability could potentially be lower if you keep a small pension pot apart from the rest of your savings and cash it in separately.

3. Loss of the tax benefits associated with older pension pots

Pension tax rules have changed over time. Sometimes beneficial features of previous regimes are retained by pension pots that were first opened under the old rules.

Again, there may not be lots of pension pots with these features, but it is worth checking before transferring any.

For example, pension pots that you started saving into before April 2006 might allow you to take more than the current standard limit of 25% of the pot as a tax-free cash lump sum.

If you have a pot with this feature, and you value that, then it might not make sense to transfer the funds into another pension pot which restricted the tax-free lump sum to a lower level.

Older pension pots may also have a protected normal minimum pension age that allows access to funds earlier than pots governed by current rules.

Again, if you have a pot with this feature and you value it, then that might offset any potential benefits from consolidating with other pots.

4. Exit fees

Most current pension pots will not have exit fees. Some older pots may do (or may have other penalties associated with early withdrawal of funds.)

It’s important to take any such charges or penalties into account in assessing whether to consolidate pension pots or not.

How to combine your pension pots

Once you have decided that you want to combine some (or all) of your pension pots, the process for doing this should not be too complicated.

The process will be smoother if all of the providers managing your different pots have your up-to-date personal details, so it is worth checking these.

The main decision will be which pot to move other pensions into. This decision will be based on many of the same factors set out above.

Once you have selected a pot to use to consolidate your pensions, you can tell them you wish to transfer other pots in.

Usually the provider you have chosen to hold your combined pension pots will contact the other providers and make the practical arrangements for this.

You will usually need to supply this provider with the details of the pots (eg policy number etc.) that you are looking to transfer over.

[top]

Who do I contact about my pension?

Key organisations

Pension Protection Fund (PPF) – Compensation scheme for defined benefit pension schemes when the sponsoring employer becomes insolvent and whose liabilities are greater than its assets.

The Pensions Regulator (TPR) – Regulator of workplace pension schemes. Objectives are: to protect benefits of members of workplace pensions, reduce the risk of situations arising that lead to claims for compensation from the PPF and to maximise compliance with auto-enrolment legislation.

Pensions Ombudsman (PO) – Statutory dispute resolution service for complaints about pensions administration.

Financial Ombudsman Service (FOS) – Statutory dispute resolution service for financial services sector, with the exception of pension administration. For pensions it only covers the mis-selling of pension products.

Financial Conduct Authority (FCA) – Regulates standards of conduct in financial markets and supervises the infrastructure that supports those markets. Objectives are to promote competition in the interests of consumers, protect the integrity of the financial system and secure consumer protections. It also regulates independent financial advisers.

Money and Pensions Service (TPAS) – Independent voluntary organisation funded by the Department for Work and Pensions that provides information and guidance to the public on workplace and state pensions.

Pension Wise – Produces online content, telephone guidance and face-to-face meetings for those aged 50 or over with defined contribution pensions who are considering their options for retirement. This service is funded by a levy.

[top]

Where can I find the rules of the pension scheme?

Defined benefit pension schemes are governed by the rules of the scheme.

Trust based schemes will have a Trust Deed and Rules, which is the legal document that governs the running of the pension scheme. If you are a member of a trust based scheme, you can request a copy of the trust deed and rules from the scheme administrator.

Statutory schemes, such as the Civil Service, Fire and Local Government Pension Schemes have rules that are written into legislation. The rules of these schemes are publicly available.

Civil Service Pension Scheme Rules

Fire Pension Scheme Rules

Local Government Pension Scheme Rules

In most cases you can find the answer to queries on how your benefits are calculated in the member booklet of your pension scheme. Member booklets will often provide a summary of the rules of the scheme. If you are looking for a definitive definition then you will find this in the scheme rules.

[top]

What is an actuarial valuation or triennial valuation?

Actuarial valuations of trust based defined benefit pension schemes are required every 3 years. The valuations will value the assets and liabilities at the date of the valuation. This will require the trustees to take advice and agree on updates to the technical provisions of the scheme.

In the event that the scheme is underfunded the Trustees have a pivotal role to reach agreement with the sponsoring employer for any additional contributions from the employer. This most notably includes the length of the recovery period and if the payments are level or increasing.

[top]

What is a Trustee?

Trust based pension schemes are governed by a board of trustees who are the legal owners of the scheme. Occupational pension schemes are made up of employer and member nominated trustees. In some cases schemes will also have a professional trustee. There is a requirement for at least one third of a trustee board to be made up of member nominated trustees.

The assets of the pension scheme are held separately from the employer and the trustees are the custodians of the assets. The Trustees have a fiduciary duty to govern the scheme and act in the interests of scheme members. In practice many of the duties for governing the scheme are delegated by the Trustees. However, the responsibility for the scheme lies with the trustees.

Actuarial valuations of trust based defined benefit pension schemes are required every 3 years. The trustees have a pivotal role to reach agreement with the sponsoring employer for the technical provisions of the scheme and for recovery payments if they are needed.

[top]

How can Bectu help me with my pension?

Pensions is probably the most complex area that Bectu representatives handle on behalf of members, who are covered by hundreds of different pension schemes.

We offer advice and legal representation on pensions issues. Members seeking this should first contact their local Prospect rep or full-time negotiator.

If a member dies, their partner, spouse or other beneficiaries of the pension scheme can seek advice from Bectu about matters relating to the benefits and rights of dependents arising from the scheme for up to 12 months after the member’s death.

Please note Bectu are not authorised under the Financial Services and Markets Act 2000 to provide financial advice.

We represent members’ pension interests in a number of ways:

  • providing assistance on specific queries
  • encouraging reps to become member-nominated trustees of their pension schemes
  • providing training and regular briefings for pension reps and trustees
  • taking a leading role in helping members negotiate improvements to their pension schemes
  • obtaining independent actuarial advice on changes that employers propose to their pension schemes
  • helping members with queries relating to Fair Deal and New Fair Deal

We have an excellent record in dealing with members’ pension rights, from:

  • resolving problems relating to the late payment of pension benefits
  • advising on the detailed application of their scheme’s rules
  • helping members present cases to the Pensions Ombudsman
  • negotiating major improvements to their pension schemes.

[top]

Get support as a member

Speak with your representatives: 
If you work in an organisation that has local Bectu representatives, you should speak to them about any work-related issues.

Call the member contact centre on 0300 600 1878 or email [email protected]