Why do I need a pension?

A pension is designed to help you fund your retirement and replace the income you are no longer receiving from working. It can fit alongside all your other savings, from bank and building society accounts to property.

You could think of pensions as the first of three important ways to support your retirement. The second may be your home (some people talk about their property as their pension) and the third, all your other savings and investments such as deposit accounts and shares. Your retirement income may come from any combination of the three.

There are three main categories of pension provision to consider: state pensions, company schemes and individual pensions.

Benefits of pensions

There are several benefits of using pensions to save for retirement:

• *Tax relief
  When you save in a pension the taxman helps to increase your pension pot by providing tax relief, subject to certain limits.

  If you have an individual personal pension, your contributions have already been taxed before they go in to your fund. Any basic rate tax is then refunded back to your plan by the taxman. Higher rate taxpayers can claim back additional tax relief through a self-assessment tax form - read more about tax relief.

  If you have a company pension tax relief works in a slightly different way. Contributions are deducted from your gross salary before income tax. As income tax is based on your pay after deducting your contributions you automatically receive tax relief at your highest rate. The tax relief for Group Personal Pensions works the same as individual personal pensions. Note that pensions in payment are taxed as earned income.

• Tax-efficient growth
  Money in your pension fund grows largely free of tax. This can help to boost the amount you have in you fund. Remember that the value of your fund can go down as well as up and you may not get back your original investment.

• Employer contributions
  With company pensions your employer makes contributions to your pension, increasing the amount going into your fund. Depending on the scheme they may at least match the contributions you make, or pay even more. To see how this can really help boost your pension pot - read more about company pensions.

• Access to tax free cash in retirement
  When you take your benefits you may have the option of taking up to 25% of the pension fund you have built up as tax free cash (depending on your age, the scheme rules and tax allowances). So if you build up a fund of £100,000 for example, you may be entitled to take £25,000 as a tax free lump sum.

• Access to investing in funds
  By saving in a pension, you're able to put your money in a range of investments, such as the stock market, commercial property, bonds, and funds. The range of investments will depend on the scheme.

  The above is based on our current understanding, as at 6 April 2010, of current tax legislation and HM Revenue & Customs practice, both of which may change without notice. The impact of taxation (and any tax relief) depends on individual circumstances.

You may need more money than you think in retirement

Average life expectancy is increasing, meaning that the length of your retirement could last longer than you expect. So it's important to think about the income you're likely to need for your retirement and the ways in which you can generate it.

Saving in a pension is a tax-efficient way of building an income and should ideally form part of your overall retirement plan