A defined benefit pension (also known as a final salary pension) is usually set up by your employer. It guarantees you a regular income in retirement, usually based on your salary and the number of years you have worked. The level of income may also increase in line with inflation.

On the other hand, defined contribution pensions do not offer you a guaranteed level of income. The amount of money you will have in retirement depends on how much you and/or your employer has contributed and how well your pension investments have performed.

The annual allowance is the maximum amount of pension contributions you can make each tax year that benefit from tax relief. You would be subject to a tax charge (the annual allowance charge) if your pension contributions exceed your available annual allowance for a tax year. The standard annual allowance is currently £60,000. Each year, you can personally contribute up to 100% of your relevant UK earnings into a pension or the annual allowance (whichever is lower) and receive tax relief.

The usual £60,000 annual pension allowance is reduced for people with an adjusted annual income of £260,000 or more. The allowance reduces by £1 for every £2 of income above £260,000, down to a minimum of £10,000. This is known as the tapered annual allowance.

Pension carry forward lets you pay more than your annual allowance into your pension by ‘carrying forward’ any unused allowance from the previous three tax years (as long as you have sufficient earnings). You will still receive tax relief on the payments and it can be useful for those affected by the tapered allowance.

Investments in pensions grow free from income tax and capital gains tax. Pension contributions are paid from gross (pre-tax) income. Where tax has already been paid on a pension contribution it is refunded. The tax office will automatically top up pension contributions up to your annual allowance by 20% to cover basic rate tax. Higher or additional-rate tax payers can then claim back any higher or additional-rate tax that they have paid on contributions through their tax return.

A defined benefit (final salary) pension will usually stop paying an income when you or, if your pension income passes onto a dependant, your dependant dies. The benefits from a final salary scheme can only be paid to your husband, wife, civil partner or dependant child under the age of 23 (unless they are dependent on you because of a disability).

A defined contribution pension can be passed on to anyone you choose via a nomination of beneficiary (also known as an expression of wish). If you die before the age of 75 the pension will be passed on tax-free. If you die after 75, your beneficiaries will pay their usual rate of income tax on any money taken from the pension.

Pensions do not usually form part of your estate so they are not charged with inheritance tax when you die. However, any income or lump sum death benefits paid from your pension may form part of your estate and therefore be liable to tax.

Passing on a pension has become a popular estate planning tool for this reason. In some cases, when you retire, your pension is the last thing you should touch as it might be more tax-efficient to draw on your assets which are liable to inheritance tax first, so that you can leave behind more in your pension to your beneficiaries.