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How do pensions work?

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Quick answer

A pension works by setting aside money during your working years so you have income after you retire. You (and often your employer) contribute regularly; the money is invested and grows, then pays you a regular income in retirement. You save money during your working life.

Step by step

  1. You save money during your working life.
  2. Employers often contribute too.
  3. The money is invested and grows over time.
  4. It provides regular income after you retire.

People also ask

How do pensions work?
You contribute money while working; it's invested to grow, then provides income once you retire.
What's the difference between defined benefit and defined contribution pensions?
Defined benefit pays a guaranteed amount; defined contribution depends on how much is saved and how investments perform.
Why start a pension early?
Compound growth means money invested early has far more time to grow into a larger retirement fund.

Part of the guide: Money Basics: Save, Borrow & Invest →