UK Workplace Pension Explained

Taking a £64,000 pot as one cash lump sum at 57 while still earning £38,000 costs £16,746 in income tax (2026/27). Take the same money as £16,000 tax free now and £16,000 a year for three years after the salary stops, and the tax is £2,058. The scheme is identical in both cases. The difference is entirely in how the money comes out.

Which type do you have

Defined contribution (DC) is a pot. You and your employer pay in, the money is invested, and what you end up with depends on contributions and returns. No income is promised. Almost every private sector scheme opened in the last two decades is DC.

Defined benefit (DB) is a promise: a specific annual income worked out from your salary and years of service, either final salary or career average. The employer makes up any shortfall, which is why most private sector employers closed these schemes to new members.

Your annual statement settles which you have, because DC shows a pot value and DB an accrued annual income (GOV.UK).

Moving out of DB into DC is regulated separately: where the safeguarded benefits are worth more than £30,000, independent financial advice is a legal precondition of the transfer (DWP guidance). The rule exists because a transfer value looks enormous next to the annual income it replaces.

What goes in

Under auto-enrolment the statutory minimum is 8% of qualifying earnings, the slice of pay between £6,240 and £50,270 (2026/27): 5% from you, 3% from your employer. The band, the opt-out window and re-enrolment are in auto-enrolment pensions explained.

Plenty of employers pay more than 3%, and matching is the part of a benefits handbook worth reading closely, because employer money is the only return that arrives before any investment does. A 1:1 match capped at 6% and a flat 4% are very different offers (employer pension contributions).

Which relief mechanism your scheme uses matters above 20% tax: net pay gives relief at your marginal rate automatically, while relief at source leaves a 40% or 45% taxpayer to claim the balance through Self Assessment (pension tax relief explained). Relief on your own contributions is capped at 100% of your relevant UK earnings, or £3,600 if you have little or none. The annual allowance is a separate limit of £60,000 (2026/27) and counts your contributions and your employer's together.

What happens when you change jobs

Nothing happens, which is the problem. The pot stays with the old provider, stays invested, and stops receiving contributions. Your new employer enrols you into its own scheme and a second pot starts.

One rule catches people out. If you were in a DB scheme for less than two years when you left, its rules may allow a refund of your own contributions or a cash sum transfer instead of a deferred pension (GOV.UK). Employer contributions do not come back.

Old pots can be left alone, moved into the new employer's scheme where it accepts transfers, or consolidated into a personal pension or SIPP. Before moving anything, check the old scheme for exit charges, a guaranteed annuity rate, or a protected right to a tax free lump sum above 25%, all of which GOV.UK names as things a transfer can destroy.

Getting the money out

Normal minimum pension age is 55, rising to 57 in 2028. From that age a DC pot can be taken as cash, exchanged for an annuity, moved into flexi-access drawdown, or split across all three.

Up to 25% of each pension is tax free, subject to a lump sum allowance of £268,275 across all your pensions (2026/27). The lifetime allowance was abolished on 6 April 2024, so the pot itself is no longer capped, though the tax free slice still is. The rest is taxed as income in the year you receive it, and that timing is where the money is won or lost.

Worked example, 2026/27 rates. You are 57, earning £38,000 with no other income, and you take a £64,000 pot as cash in one go.

When we modelled this across a range of salaries, £38,000 was the case that stung most. That salary sits comfortably inside basic rate on its own, so every pound of the higher rate charge is created by the withdrawal: £48,000 of taxable pension pushes £35,730 into the 40% band. Take the £16,000 tax free now instead and draw £16,000 of taxable income in each of three years once the salary has stopped, and each year costs (£16,000 − £12,570) × 20% = £686, or £2,058 in total. Same pot, £14,688 less tax, assuming those three years carry no other taxable income and the bands are unchanged.

The second consequence is easier to miss. Taking taxable cash flexibly cuts your annual allowance from £60,000 to the money purchase annual allowance of £10,000 (2026/27) for all future DC contributions, and it does not reset (GOV.UK). Taking only the tax free lump sum and moving the rest into drawdown without drawing income does not trigger it. At 57, still working and still contributing, that distinction is worth more than the cash. Model the order you draw things in with the retirement calculator before committing to a tax year. Your provider deducts tax before paying you, and GOV.UK warns you may still owe more at the end of the year (tax when you get a pension).

Fees, and what the cap actually caps

Default funds in schemes used for auto-enrolment carry a charge cap of 0.75% of funds under management (DWP charge cap guidance). Transaction costs sit outside that cap, and so does anything you self-select instead of the default.

The cap gets described as protection. Our reading is that plenty of schemes treat it as a benchmark rather than a limit: 0.75% is several times what running a global equity index fund costs, so a scheme charging 0.70% is inside the rules while being expensive. The counter-argument is fair. The capped figure covers administration, communications and governance as well as investment management, so setting it against a fund's ongoing charges figure is not like for like. Your own scheme's charge sheet next to its self-select range settles it, and those two numbers are often nothing alike.

Rates: GOV.UK, tax on your private pension contributions and lump sum allowance. This page explains the rules and is not personal advice; your scheme's own rules take precedence.