Different types of pensions

The State Pension is a pension paid to you from the government when you reach state retirement age. To be eligible for a full basic State Pension you must have 30 qualifying years of National Insurance credits or contributions.

The official gov.uk website is home to all the information you need about State Pensions, including when you are eligible to claim yours.

A personal pension is a specific savings account you can set up to help you financially prepare for retirement. They are often referred to as ‘defined contribution’ or ‘money-purchase’ schemes. A defined contribution pension is based on how much you have contributed to, as well as the growth of, your pension.

The money you contribute to your pension will be invested in a range of assets, organised by a fund manager. These can be:

• Cash
• Bonds
• Stocks and shares
• Property

A personal pension is a popular option for people who may not have access to a workplace pension, such as if you are self-employed or if you are not currently in work but want to begin saving. People other than yourself may contribute to your defined contribution pension, such as your employer or your partner. Parents may also want to contribute to their child’s pension.

You can access the funds in your personal pension once you are 55, increasing to 57 in 2028, however this may vary depending on your pension provider. 

Defined contribution pensions offer several options when it comes to withdrawing your money. You can:

• Cash in the whole amount
• Combine your pension pots (this can be done at any point, not just on withdrawal)
• Take a lump sum
• Invest in a pension annuity
• Take a flexible income via drawdown
• Keep your money invested in the pension and take it out when you need it

Subject to the terms and conditions of your individual pension, you could choose to combine one or more of these options.

Personal pensions are also subject to tax relief, which means you’ll receive a certain portion of your pension tax-free.

Typically, 25% of your pension is tax-free and the rest will be subject to standard Income Tax. 

Workplace pensions are those offered by your employer. It is a legal requirement that your employer offers a pension. They are subject to tax relief, so you can access a portion of your workplace pension tax-free.

There are two different types of tax relief available for workplace pensions. A ‘net pay’ arrangement means your contribution is taken before tax is deducted. A ‘relief at source’ arrangement means Income Tax and National Insurance will be deducted before your pension contribution is calculated.  

Your pension scheme provider will claim the tax back from the Government at the basic rate of 20%, which is then added to your pension.

You will still be able to access your pensions from all your previous employers once you retire, but you may not qualify for all the benefits if you have switched pension providers. 

The two main types of workplace pensions are:

• Defined benefit
• Defined contribution

Employees are automatically enrolled in the scheme, providing their employment status meets the qualifying criteria. You will make regular, automatic contributions to your pension that will typically come out of your wage. Your employer will then match your contribution, or a percentage of it.

These pensions currently benefit from 20% tax relief. This may differ for higher earners, who will need to contact HMRC to find out their tax relief based on their salary and contributions.

A defined benefit plan is a pension scheme where your employer agrees to pay you a set amount of money when you retire. The amount will be based on your length of time with the company, your salary history and your age.

This differs from a defined contribution pension plan, which takes regular contributions from you, your employer, or both. These schemes are largely historic now and only used by a handful of employers (usually public sector).