When you’re young, retirement seems a long way off. But the earlier you start saving, the easier it will be to build a fund that lets you realise all of your retirement dreams. Pensions are typically the most tax-efficient, and effective way to build that pot up over time.

A pension is a savings account with bells and whistles attached. It gives you tax relief on everything you save (which means money you would have paid to the government as income tax goes into your pension instead). Your employer is obliged to contribute too. The money is locked away, so you can’t be tempted to dip into it. You can withdraw a tax-free lump sum when you reach the age of 55, or 57 from 2028.

As with any investment, the value of pensions, and any income you take from them, can fall as well as rise, and you may get back less than you invested.

There are many reasons why it makes sense to invest in a pension, and why you should begin doing so as early as possible. Here are four of the most compelling incentives.

You’ll receive tax relief on everything you put into your pension, up to a maximum contribution of £60,000 per year.

If you’re a 20% tax-payer, you’ll get a 20% top-up on every pound you put into your pension fund. If you’re a 45% tax-payer, you will receive a 45% top-up – that means for every £100 you put into your pension, the government will top it up with £45 (resulting in a total pension contribution of £145).

You will need to pay tax on your pension income when you retire. But if your retirement income falls into a lower tax band than it did when you were employed, that government top-up will effectively be free additional money for you. Remember that the value of tax benefits will depend on your circumstances and tax rules may change in the future.

If you’re employed and have a workplace pension scheme, your employer must contribute 3% of your earnings to your retirement pot. This is a minimum figure, and many employers are far more generous than this.

The earlier you start paying into a pension, the more compound interest it will generate, and the bigger your pot will grow over time. Compounding is when any interest you receive is automatically reinvested again, and again, and again. So, without doing anything, you can watch your retirement pot grow, far exceeding your original contribution.

When you’re 55 years old, 57 years from 2028, you can take 25% of your retirement pot entirely tax-free and do exactly what you want with it. But you must ensure you keep enough in your pension to sustain you for what could be many decades.

If you’re new to pensions, it’s important to understand that not all of them are the same. Broadly speaking, there are three main types of pension:

• workplace pensions
• personal pensions
• the State Pension

Workplace pensions are arranged by an employer for their employees. The most common type of workplace pension is a defined contribution scheme, which means the fund grows based on the amount that’s invested into it. Since 2018, all employees aged 22 years and over and earning more than £10,000 should be automatically enrolled in a workplace pension.

The value of the fund is entirely reliant on how much you and your employer contribute to it, the length of time the funds have been invested, and how well it has performed.

You’ll pay a minimum of 5% of your salary into a workplace pension, and your employer must contribute a further 3%. So, the minimum contribution is 8% in total.

However, many employees decide to pay more, and some employers choose to be more generous. In some cases, if you choose to pay more, your employer will match your contribution. You’ll need to check your employment contract or ask your employer for information if you’d like to know more about your company’s pension policy.

If you are self-employed, do not qualify for your company’s workplace pension, or choose to opt out of your employer’s workplace pension scheme, you’ll need to set up a personal pension. You’re also able to set up a personal pension even if you have workplace pension in place.

Like a workplace pension, a personal pension is a defined contribution scheme. But unlike a workplace pension, there is no employer contribution – you are solely responsible for it.

Although it doesn’t make up for not receiving a contribution from your employer, a personal pension does offer benefits like greater flexibility and choice compared to a workplace pension. For example, if you have an irregular income or you need to pay a large expense, you can increase and lower your contributions from month to month.

And, like many workplace pensions nowadays, you can choose the types of funds you wish to invest in too. For example, you could choose to only invest in ethical funds, and control how much investment risk you want to take.

Perhaps the most significant advantage with a personal pension is you can carry on contributing to it when you change jobs, because it’s not related to your employer. This means you can manage your pension pot through a single scheme, giving you greater oversight and control of your money.

Despite these benefits, it is worth making the point that you are solely responsible for the investment into your personal pension. And if you are employed and qualify, you should always take full advantage of any workplace pension to ensure you benefit from your employer’s contribution.

Depending on what year you were born, you will be able to start claiming a State Pension between the ages of 66 and 68. To receive a full State Pension you usually need to have made 30 years of qualifying National Insurance contributions, and 10 years of contributions to receive any State Pension at all. Currently, someone who qualifies for a full State Pension will receive £221.20 per week, or £11,502 a year. This is due to increase by £473.60 in 2025/26, to a total of £11,976 a year. But even with the increase, for most people, it barely covers the basics.

If you’re just starting out in your work-life and want to start putting money aside, or you already have a retirement pot but want to ensure you’re on track to achieve your dreams, we can help.