Types of pensions

There are many different types of pensions, each with their own advantages and disadvantages.

State Pension

The State Pension is a retirement income provided by the UK government to those who have reached State Pension age. The amount pensioners receive depends on their National Insurance record. You become eligible from 10 years of National Insurance contributions, whilst the full State Pension is only available for those who have paid National Insurance contributions for at least 35 qualifying years. The State Pension amount usually increases every year according to the three commitments outlined in the pension triple lock – whichever is highest of:

Earnings growth
Inflation
2.5%.

You can read more about the State Pension, including up-to-date figures, on the government website.

Private pensions

Private pension schemes usually fall into one of two broad categories:

Defined benefit pensions

More commonly known as ‘final salary’ pensions, a defined benefit (DB) pension is a type of workplace pension that pays out an income according to your salary at retirement and how long you have worked for your employer.

These days, DB pensions are rare and typically are limited to the public sector and older occupational pension schemes.

Defined contribution pensions

A defined contribution ( pension is the most common type of workplace and private pension. The income it pays out on retirement depends on how much you and your employer (if you have a workplace pension) or you individually (if you have set up a private pension) have contributed over the years, how well the funds have performed, and any fees you’ve had to pay out.

Contributions to a DC pension are eligible for tax relief from the government, further boosting your pension savings and making them one of the most tax-efficient savings vehicles available in the UK.

Workplace pensions

Depending on your employment situation, you will either be enrolled in a workplace pension (if eligible) or you can set up a private pension yourself (or both). In 2012, automatic enrolment was first introduced in the UK to encourage more people to save for retirement. By law, all employers must provide a workplace pension scheme to which they automatically enrol eligible employees (unless they opt out). Employers must contribute a minimum of 3% of each employee’s salary to their pension, with employees contributing a minimum of 5%, bringing the total to an 8% minimum contribution. Some employers will offer enhanced pension contributions, so it is worth asking for details of your particular workplace pension scheme from your employer. Most people will accumulate multiple pensions across their career, which can make it difficult to keep track of your retirement savings. Some people choose to consolidate their pensions to make them simpler to manage and potentially benefit from lower charges.

Small Self-Administered Schemes (SSAS)

Small Self-Administered Schemes (SSAS) are a specialist type of workplace pension set up by limited companies often on behalf of directors and senior management. Instead of being managed by an external pension provider, SSAS are managed by professional trustees, giving scheme members more flexibility and a higher level of control than with any other type of UK pension scheme.

Members have full control over how their pension is invested and the pension can also be used to purchase commercial property (for example, the business’s own premises).

SSAS pensions are not regulated by the Financial Conduct Authority OR SSAS pensions are overseen by The Pensions Regulator.

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Personal pensions

As the name suggests, a private pension is a pension set up privately by an individual to fund their retirement. As self-employed individuals do not qualify for workplace pensions, for example, by setting up a pension privately they can ensure they don’t fall behind on their retirement savings plans.

You can make regular or lump sum contributions (or both) and you will receive government tax relief on these contributions, just like with a workplace pension scheme.

Self-Invested Personal Pensions (SIPPs)

Self-Invested Personal Pensions (SIPPs) are specialist personal pension schemes that allow savers control over how their pension is invested. Whilst many typical private pensions are invested in ready-made portfolios, a SIPP will usually offer a broad selection of funds that SIPP owners can pick and choose according to their preferences.

Usually, SIPPs are most suited to those with an active interest in managing their investments – although, with expert financial advice, they can suit anybody wishing to fund a comfortable retirement.

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Contact us for advice

Although this page offers some general advice on different types of pensions and which ones might be suitable for you, we would highly advise that you take professional financial advice before making any decisions about your pension.

The type of pension you choose, and how it’s managed, can make a significant difference to the lifestyle you are able to enjoy in retirement, so please contact us for more information and professional guidance.