What are the different types of pensions in the UK?

Anyone thinking about work or retirement knows just how important it is to set up a pension plan as soon as possible. Not only do early pension contributions mean you’ll have a sizable pot of savings come your last day in the office, but said fund is likely to be much bigger than your overall contributions thanks to tax relief and interest accrual.

But setting up a pension is not as simple as just reaching out to the government and asking to have them enrol you on one. In fact, there are a variety of pension types of there that you could qualify for, and you’ll need to pick the right one for your circumstances.

Fortunately, once you understand the various types of pension schemes available to you, the process of choosing and paying into one becomes relatively seamless. So, in order to clarify the differences between the various pension types, we’ve broken down the types of pension you can apply for in the UK.

What are the different pension scheme types offered in the UK?

In the UK, there are three main types of pension. These include the following:

• A state pension
• A workplace pension
• Personal Pension Schemes

On top of these three pension types, you might also find the following two sub-categories attached to any workplace and self-employed options presented to you:

• Defined contribution pension
• Defined benefit pension

These sub-categories determine how a pension is paid into, and paid out, and are worth understanding so that you know exactly how to manage the pensions in question.

What is a state pension?

A state pension is exactly what it sounds like, a regular sum that is paid directly to you via the government once you reach the defined retirement age threshold.

In the UK, the current age you can claim your state pension is 65, though this is set to increase in the near future. Those claiming their state pension can expect to receive £185.15 per week, every four weeks, for a total of £9,627.80 per year. This is not taxed, though it will contribute to your tax-free income allowance for the year.

The value of a state pension is defined by the amount of national insurance you have paid and the number of years you’ve worked. You don’t immediately receive your state pension upon turning 65 and you must instead apply for it from the government.

Workplace pensions

With the limited potential of a state pension in mind, it should come as little surprise that the majority of people seeking a pension do so through their place of work.

Like a state pension, workplace pensions are as they sound, and are provided by your place of employment, who take money from your overall salary and invest it into a pension fund to increase its worth, which you can boost further with your own additional contributions.

In most cases, you will automatically be signed on to your workplace pension unless you request otherwise, though this is ill-advised unless you find yourself in extenuating circumstances.

Defined contribution pension

Defined contribution pensions are the most common type of pension provided to employees in the workplace and are also an option when setting up a personal pension plan.

With this type of pension, a set total of your salary is put aside to be invested each month. This is withdrawn before you are paid and is typically matched by the employer before being invested by the pension provider.

The overall size of the pot you receive at the end will be determined by the amount you’ve paid in, the investment’s success, and any charges that apply when withdrawing funds. Said investments are usually low risk, ensuring some degree of financial growth, and you get the added benefit of choosing how to withdraw your money at the end.

This flexibility is the primary reason why most employers and self-employed individuals opt for a defined contribution pension, though it’s worth pointing out that there are no guarantees that your pension investment will do well.

Defined benefit pension

Much rarer than they were in the past, defined benefit pensions are almost exclusively arranged by an employer. Sometimes called a final salary pension, they provide you with a guaranteed annual pension based on your salary at the end of your tenure, how long you worked for the company, and the terms of the scheme in question.

It is due to the employer expense associated with providing a guaranteed income for life that has led to the decline in defined benefit pensions in recent decades.

Personal pensions

Specifically designed to help those who are either self-employed or unemployed, personal pensions work on much the same basis as workplace pension options, though with a few additional options and caveats.

Practically all personal pensions fall under defined contribution pensions, only instead of the employer matching your contributions, the government will provide tax relief at your marginal rate.

One of the great things about this type of pension is that you can open one in tandem with your workplace pension, giving you a wider potential pot once you decide to retire.

However, with these types of pension schemes, you’ll also be faced with a wide variety of different options, all of which have different terms and conditions that you’ll need to assess for the following criteria:

• What are the upper and lower contribution limits?
• Can you stop and start payments at your own discretion?
• Can you make additional lump sum payments on top of your regular contributions?
• Where will your pension be invested?
• What is the range of investment options available?
• What are the associated charges around managing your pension?
• What level of help and support does the firm in question offer?

To simplify this process, it’s recommended that you work with a financial advisor, so you fully understand the potential commitments, such as those on our team here at Blacktower.

SIPPS

SIPPS, also known as a Self-Invested Personal Pension, are a unique type of personal pension that allows you to have greater control over where your pension is invested. They can be a good way of spreading out your pension for a greater return on investment but come with a much higher degree of risk.

Again, it is recommended that you speak with a financial advisor if you plan on choosing a SIPP, unless you’re comfortable and knowledgeable in making investments on your own.

Can I combine my different types of pensions?

While researching various aspects of pensions, you may have noticed information about the potential of combing older pensions with new ones so you only have one pot to worry about.

This is certainly possible, though you will need to check to see if your pension schemes are compatible, so it’s best to speak to your provider and a financial advisor. You can also read more about this on our consolidating your pension page.

These are the most common types of UK pensions that you’ll have access to, but if you want more information regarding pensions in general, including international pensions, then why not visit our pensions hub ?

Our pensions hub is filled with useful information about the topic, such as advice on saving for retirement and what can happen to your pension if you pass away . Get in touch with the Blacktower team today to discuss this further or inquire about our international services.