A Guide to the Different Types of Pensions

Pensions can be a confusing subject. Whether you're approaching retirement or only just starting to plan for the future, understanding your pension(s) is crucial if you want to look after your finances. Did you know there are three main types of pension in the UK? This article will explain the different types of pensions to help you find the right scheme for you.

What are the Main Types of Pension?

Plenty of us don't bother thinking about our pensions until we're well into our working life. After all, retirement seems a lifetime away when you're a young person in your first job. But before you know it, you're approaching retirement without much understanding of what happens next. That's why it's important to understand the different pension plans available. Let's take a look at the main types of pensions in the UK.

State Pension

Most people will be entitled to a State Pension, which you can start claiming once you reach State Pension age (SPA). The amount you can claim will depend on a few factors, including:

• When you were born
• Your gender
• Your National Insurance contributions
• When you start taking your State Pension (you'll get higher payments if you defer)

In recent years, the government has been making changes to the State Pension age. Under the old system, women could claim State Pension from the age of 60, while men could start claiming from the age of 65. Now, the minimum age ranges from 61 to 68, depending on your age and gender. You can use this helpful calculator on the UK Government website to work out when you can start claiming State Pension.

A note on Retirement Age: There used to be a default retirement age of 65 in the UK, but the law changed in 2011. This was to stop employers from forcing workers to retire at 65. Now, you can carry on working for as long as you'd like. You can keep working while claiming State Pension if you wish.

Private Pensions

In addition to the State Pension, many people also have private pensions. A private pension is another way to save up money while you're working to support yourself later in life.

There are two main types of private pensions in the UK.

• Workplace pensions
• Personal pensions

Workplace Pensions

A workplace pension is arranged by your employer - it might also be called an occupational pension or company pension. By law, all employers must offer a workplace pension. They must enrol you into their pension scheme automatically if you are older than 22 and younger than State Pension age, you earn at least £10,000 per year, and you usually work in the UK. Nowadays, most workplace pensions schemes are defined contribution (DC) schemes (also called 'money purchase schemes') rather than defined benefit (DB) or 'final salary' schemes.

If you become eligible for a new workplace pension, either because you've started a new job or because you've met all the criteria for the first time, your employer will write you a letter telling you that you've been enrolled on their workplace pension scheme. This letter will also tell you how much they'll contribute to your pension and how much you'll have to contribute. Your contributions will be deducted from your salary automatically each payday.

You can choose to opt out if you wish by contacting your pension provider. Their details will be in the enrolment letter you received. If you opt out within the first month, you should get back any money you've paid in so far.

Using Your Workplace Pension

Lots of workplace pension schemes set a minimum age when you can start using the money in your pension pot. In most cases, you can withdraw 25% of your pension fund as a tax-free lump sum when you reach 55 (rising to 58 in 2028).

There are a few different ways to take money from your pension fund, each with their own benefits and risks.

• Annuity - you can buy an annuity from your pension provider or an insurance company. This will give you a guaranteed, regular income for life (or for a fixed term e.g. 10 years).
• Withdraw cash - you can take cash directly from your pension pot in a lump sum or in smaller amounts.
• Drawdown fund - you can invest your pension pot in a flexi-access drawdown fund. From this fund, you can make withdrawals and/or buy a short-term annuity. You can also keep paying money into your pot, but you'll pay tax on contributions over £4,000 per year.

Personal Pensions

Unlike a workplace pension, a personal pension is one you arrange yourself. Most personal pensions are defined contribution (DC) schemes, where the money you pay in is invested by the pension provider. This means that the amount of money you receive will depend on how much you pay in and how well the investments perform. Anyone under the age of 75 can start a personal pension. They're especially useful for those who are self-employed, unemployed, or don't qualify for a workplace pension scheme. However, if you already have a workplace pension, there's nothing stopping you from setting up a personal pension too. This can be a great way to plan for retirement and increase your income in your later years.

Types of Personal Pensions

There are three mains types of personal pensions:

• Standard personal pensions - offering a range of investment choices.
• Stakeholder pensions - offering low minimum contributions and a default investment strategy, so you don't need to make investment decisions yourself.
• Self-invested personal pensions (SIPPS) - offering more choice and flexibility when it comes to investments.

Choosing a Personal Pension

It's entirely up to you to decide which scheme would suit you best. If you're looking to set up a personal pension, here are a few key factors to keep in mind.

• What are the minimum regular contributions? Can you choose to pay monthly or annually?
• Does the scheme allow you to make one-off payments if you find yourself with some spare cash?
• How flexible are the options for taking money out of your pension pot?
• Do you want to have some say in how your contributions are invested?
• What are the annual management fees? This is usually calculated as a percentage of your total pension fund.
• Are there fees if you decide to switch to a different pension provider later down the line?

More Pensions Advice

We hope you've found this guide useful. If you'd like more information about pensions, savings, and general finance tips, read the articles below:

• Top Finance Tips for You and Your Elderly Loved Ones
• 10 Ways to Save, Save, Save!
• What You Need to Know Before Investing Money

Alternatively, check out the following websites for more impartial money advice:

• Money Helper
• Citizens Advice
• Money Saving Expert
• Which?

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