Pensions are complicated. But they are a vital part of planning for the long-term future because the tax breaks are enormous and once you miss them they’re gone.

It’s broadly true that the only reason for your not taking advantage of pension plans is that you can find no way of making any money available.

Terminology

When you talk about a pension you probably mean the income you are going to get when you retire. But as used on this page, and by financial product providers, 'pension' has a more precise meaning. It is a set of savings products parcelled up to take advantage of favourable tax breaks and then sold to you as a package, usually called a 'pension plan'. So a ‘pension plan’ is a savings plan in a wrapper.

The big difference from conventional savings is that you are restricted in what you can do with the assets, both before and after retirement. (This is only fair: you will have received big tax reliefs on the way to retirement.)

The savings within the wrapper must be used to fund a pension. The main types are ‘annuity’ or ‘drawdown’:-

• ‘Annuity’ means you receive a defined income until death.

• ‘Drawdown’ means you take what income you like out of your fund after retirement, subject to limits.

Some rough answers

The tax advantages of pension plans are so considerable that:

• it will skew your planning in favour of saving for retirement instead of saving for other important wants.

• it will skew your planning in favour of saving for retirement instead of current spending.

If your employer offers an occupational pension scheme you will have both tax advantages and contributions from your employer. You need to have very strong reasons not to participate.

Don’t lose track of the overall objective. You have to prepare for the time in your life when your earnings decline. That should be a key part of your process. It’s only the complexity of tax relief that requires a separate webpage both here and in ‘Simple Money’.

Don’t forget you are giving your money away in exchange for promises that you will get it back over a long time into the future. Those promises need to be resilient, so you had better make sure that they are properly backed. Counterparty risk.

The rules change

…..and some benefits don’t come automatically, you have to claim them yourself.

You can check the latest rules on the government website. But don’t get bogged down in the detail. Hang on to the idea that the more you can put aside, early, into a tax-advantaged pension plan the easier it will be for you later. Then get help with the mechanics.

Help

Managing your financial preparation for retirement is where your ignorance is likely to be most expensive. In the various stages of your life find excuses to chat to more knowledgeable friends or professonals. Say once every five years. Government may provide this as a free service.