There are a number of different types of pensions and these work in different ways. Here we take a look at these pensions and show you how they work.
This is the pension that most people get from the Government when they retire. Unlike some other pensions, you don’t pay directly into the State pension during your working life but you do have to fulfil certain criteria to receive it. Under the rules for the new State pension you need to have:
You need to have done this for at least 10 years – although these don’t have to be consecutive years.
You get your State pension when you reach what is known as the State pension age. For both men and women this is 66 and will rise to 67 between 2026 and 2028. The full new State pension is currently £179.60 a week.
These are the pensions that either you or your employer set up and pay into on your behalf. There are different types of private pensions.
A workplace pension is a pension that is set up by your employer. You may also hear them called work, workplace, occupational or company pensions. The type of pension your company sets up and the rules surrounding it differ from business to business but, these days, most pensions you get through work are what are known as defined contribution pensions. Most employers now have to automatically enrol their workforce into a workplace pension. This is known as auto-enrolment.
Auto-enrolment was established by the Government in 2012 to help more people save into a pension. Under auto-enrolment, if you’re between the age of 22 and State pension age, earn at least £10,000 a year and usually work in the UK, every time you’re paid, a percentage of your wages is automatically deducted and paid into a pension scheme that has been set up for you by your employer.
Those who are self-employed, are not auto-enrolled
A final salary pension – also known as a defined benefit pension – is a type of workplace pension. In the past, this type of pension was the norm but they are not so common nowadays. You often hear them referred to as ‘the gold standard’ pension because they provide a guaranteed income for life.
Under a final salary pension, your employer pays into what is known as a central fund and the overall value of the pension is worked out based on the amount you’re paid when you decide to retire, or your average salary throughout your career (also known as a career average pension). The amount of pension income you will receive is guaranteed at the outset and, unlike a defined contribution scheme, you do not have to use your pension pot to purchase either an annuity yourself or go into income drawdown when you want to take an income from your pension.
These are the pensions that you set up yourself, perhaps because:
You can even contribute limited amounts to a personal pension if you’re not working or want to start a nest egg on behalf of a child.
Like workplace pensions, personal pensions are also defined contribution schemes. There are two types of personal pension: a stakeholder pension and a Self-invested Personal Pension (SIPP). Choosing the right one for you depends on your circumstances and what you want to achieve.
Please see Important information below
What is a defined contribution pension?
A defined contribution pension is a type of pension that you either set up yourself or get through work. With this type of pension, the amount of money you have in retirement depends on how much you (and your employer if it’s a workplace pension) pay into the pension, how well your pension investments perform and how you choose to take money out of your pension when you retire.
What is the difference between a defined benefit pension and a defined contribution pension?
Defined benefit pensions, also known as final salary pensions, pay out a specific income when you retire. This is usually based on how much you earn and the length of time you’ve worked for a company. With a defined contribution pension, on the other hand, the amount you get from your pension in retirement is down to how much you (and your employer) pay in, the performance of your investments and how you access your pension on retirement. Defined contribution pensions can go up and down in value in line with the performance of your investments.
What type of pension is best?
This depends on your circumstances and the pensions available to you. Final salary pensions (also known as defined benefit pensions) are often referred to as gold standard or gold-plated pensions because they provide a guaranteed income for life. Unfortunately, most employers don’t offer this type of pension anymore. If you want freedom to choose where your pension money is invested, a Self-invested Personal Pension could well score highly with you whereas someone just wanting a simple personal pension may think a stakeholder pension is best.
How many different pensions can I have?
There isn’t a limit to the number of pensions you can have. Instead, there is a limit to the amount you can pay into pensions every year and the value you accumulate over your lifetime. People often have more than one pension, for example you could have a pension through work while also paying into a personal pension like a SIPP because you want to contribute more. It’s also common to have a number of old work pensions if you’ve changed jobs regularly although it is possible to combine some (but not all – in particular final salary pensions) into one.
Our friendly team can help with any concerns you have about pensionsCall us on 020 7189 9999
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