Learn about pensions

Pensions Explained: What they are and why they matter

Your pension could end up being one of the biggest investments you'll ever have. 

So why do so many of us barely think about it? 

Between work, family and everything else competing for your attention, retirement can feel like something that's a long way off. 

And because it's a type of investment that often ticks away quietly in the background, it's easy to forget just how important they can become over time. 

I'm Donato Boccardi, Head of Investments at Aviva. 

Every day I help people invest for the future, and I've seen just how powerful pensions can be. 

That's why we created the Pensions Playbook. 

In this 7-part series, we'll break down how pensions work, how they grow, and the simple steps you can take to make the most of yours. 

Our goal is simple, to help you see why your pension can be one of your most overlooked investments and inspire you to see it in a new light. 

Just a quick note before we begin. 

Tax rules and pension legislation can change and depend on your individual circumstances. This video is intended to provide general educational information and shouldn't be taken as financial advice or a recommendation to invest.

Let's get started. 

So what is a pension and why does it matter? 

To put it simply, a pension is a way of setting money aside during your working life, so you have an income to support you when you retire. 

Unlike most other investments, it's specifically designed to help fund your retirement, so there are rules around when and how you can usually access your money. 

In the UK, most people will receive the state pension. 

While it can provide an important foundation, many people will need additional income to support the retirement they're hoping for. 

Workplace and personal pensions can help bridge that gap. 

The earlier you start contributing, the more opportunity your pension has to grow. 

Time.

For many people, starting their first job is also the start of their pension journey. 

And from that point on, your pension has one big advantage.

If you have a workplace pension, there's another advantage too.

Your employer will usually contribute   as well, helping your retirement savings build faster than if you were saving on your own. 

And that's not the only boost your pension could receive. 

Depending on your situation, pension contributions can also benefit from tax relief, helping your retirement savings go even further. 

Exactly how tax relief works depends on your individual circumstances, and tax rules can change over time. 

We'll cover this topic more in depth later on in this series. 

Like any investment, the value of your pension can go down as well as up, so you could get back less than what was paid in. 

So that's why pensions matter. 

They're much more than just a savings account. 

They're one of the most effective ways to invest in your future. 

The better you understand how they work, the more confident you'll feel making decisions about your retirement. 

So, what different types of pensions are there?

You may already have more than one pension type without even realising it. 

A good place to start is by checking who each pension is with, and they'll usually fall into one of three main types.

When you start a new job, you'll often be automatically enrolled into a workplace pension.

If you move jobs, your new employer may use a different pension provider, but that doesn't mean your old pension disappears.

You can either keep it where it is or combine it later, if that's the right decision for you. 

If you're self-employed, you usually need to set up your own pension.

One popular option is a self-invested personal pension, often known as a SIPP.

A SIPP can be a good option if you are self-employed or looking to boost your retirement savings, as it gives you greater control over your investment choices.

You may also be able to use a SIPP to combine multiple pensions into one pot, giving you a clearer view of your retirement savings.

Many people will also receive the state pension, which is a regular payment from the government, once you reach state pension age, provided you meet the eligibility rules. 

How much you receive depends on your National Insurance record.

You can check your state pension's forecast and National Insurance record for your personal tax account on GOV.UK.

If you have gaps in your record, you may also be able to make voluntary National Insurance contributions to increase the amount you receive, depending on your circumstances.

The next thing to understand is how they work.

Most pensions fall into one of two categories,  

Defined Contribution or Defined Benefit. 

A Defined Contribution pension is what most people have today. 

It's called a Defined Contribution pension because you know what's being paid in, but not exactly how much you'll end up with when you retire. 

The amount you build up depends on how much is contributed by you and in many cases, your employer, and how those investments perform over time. 

A Defined Benefit pension works slightly differently. 

It provides a guaranteed income in retirement, worked out using things like your salary and how long you worked for your employer. 

They're much less common today, although you may still have one if you worked in the public sector or for certain employers. 

One of the biggest differences is who's responsible for the investment decision. 

With a Defined Benefit pension, your employer takes on that responsibility. 

With a Defined Contribution pension, the value of your pension depends on how much is paid in and how your investments perform over time. 

That might sound daunting, but for most people, it doesn't mean managing investments yourself, as they're looked after by investment professionals. 

So those are the different types of pensions you're likely to come across. 

Don't worry, if you're not sure which type of pension you have, a good place to start is your online account, as most pension providers will show this information there. 

With so many types of pensions, you might be wondering how you can check that your pension is right for you.  

The good news is, it can be simpler than you think. 

Here we're really talking about personal pensions and any workplace pensions you might have from previous employers. 

Things like charges, investment options, available features and the level of support can all influence whether your pension is right for your needs. 

These are some of the most common pension questions people ask us at Aviva. 

So, let's delve in and find some answers. 

My pension charges seem quite high.

What are my options?

The first step is to understand what you're paying for.

For example, you might be happy paying a slightly higher fee for more active investment management and support, so you can take a less hands-on approach. 

Or perhaps you'd rather pay lower charges, but only if the pension still offers the investment options that matter to you. For example, sustainable funds.

If, after comparing providers, you don't think you're getting value for money, you may be able to transfer your pension.

Just make sure you understand any fees, guarantees or benefits you could lose before making that decision.

Will my pension give me the flexibility and income options I need when I retire?

That's a really important question, because not all pensions offer the same options when it comes to taking your money. 

For example, some older pensions may offer fewer choices and might not include options like flexible drawdown.

So it's worth checking what your pension offers and whether those options fit with how you like to take your money in retirement.

If my pension is invested, would I lose all my money? 

It's understandable to wonder about that. 

However, pensions are designed for long-term investing, often over several decades. 

That means your money is typically spread across many different investments, rather than relying on just one company or one asset. 

The ups and downs of investing are a normal part of the journey, which is why it's important to focus on your pension over the long term, rather than short-term market movements. 

Hopefully, those questions have shown that choosing the right pension isn't about finding the perfect one. 

It's about asking the right questions, understanding your options, and making sure your pension still fits your circumstances. 

Don't worry too much about having more than one pension. 

The important thing is knowing how much each one is worth and understanding how they all fit into your retirement plans. 

Before the next episode, take a few minutes to log into your pension account and check. 

Who is your pension provider and what type of pension do you have?

Those two answers will give you a much clearer picture of your pension and a great foundation for everything we'll cover in the rest of this series.

Next time, we'll explore how your pension actually grows and why the choices you make today can have a much bigger impact over time than you might think. 

This video is intended to provide general educational information and shouldn’t be taken as financial advice or a recommendation to invest. The value of investments can go down as well as up, so you could get back less that you invest. Tax rules and pension legislation can change and depend on your individual circumstances. If you’re unsure what’s right for you, we’d recommend seeking guidance or regulated financial advice. There may be a charge for advice.

Aviva Sonic End Frame with on screen text: Aviva Pension Trustees UK Limited. Registered in England and Wales No. 2407799. Aviva, Wellington Row, YO90 1WR. Authorised and regulated by the Financial Conduct Authority. Firm Reference Number 465132.