The different types of pension schemes in the UK

Money

Even if retirement seems a long way off for you, thinking about your pension as early as possible can have a huge impact on your financial future. But with a variety of pension schemes available, it can be hard to know what you need to do to ensure you can live comfortably when you stop working. 

Understanding the different schemes and how they work will help you make informed decisions about your future. 

State Pension

The State Pension is one of the most common ways people in the UK secure an income during retirement. There are two main types: the Basic State Pension and the New State Pension.

Basic State Pension

The Basic State Pension applies to those who reached state pension age before 6 April 2016. If you qualify, your entitlement is based on how many years of National Insurance contributions you’ve made throughout your life. 

However, it might not provide a full income, which is why many people rely on additional savings.

New State Pension

For those who reach state pension age on or after 6 April 2016, the New State Pension applies. The amount you receive is also based on your National Insurance contributions, but it is a clearer and potentially higher amount than the Basic State Pension. 

You’ll need 10 qualifying years of contributions to get any New State Pension, and 35 qualifying years to get the full entitlement. Many people still supplement this with other savings or workplace pensions to ensure they can live comfortably.

Workplace pensions

In the UK, most employees are automatically enrolled in a workplace pension scheme. There are two main types: Defined Benefit (DB) and Defined Contribution (DC).

Defined Benefit (DB)

A Defined Benefit pension guarantees you a set income when you retire, based on your salary, how long you’ve worked for the company, and often inflation. For example, the Local Government Pension Scheme is a type of DB scheme that’s only available for public sector employees. 

DB workplace pensions give you peace of mind, as you know exactly how much you’ll receive upon retirement, regardless of investment performance. However, they are rarely offered in the private sector anymore – and therefore are only available to around 20% of the workforce.

Defined Contribution (DC)

In a DC scheme, both you and your employer contribute into your pension pot, which is linked to investments in an attempt to boost the total amount. The final amount you get when you retire depends on how well investments perform. 

Unlike DB schemes, there’s no guarantee of the amount you’ll receive, so it’s important to monitor and manage your pension pot over time. 

Personal pensions

Personal pensions are another way to save for retirement and may be used if you’re self-employed or want to add extra money to your retirement savings.

Stakeholder Pensions

A Stakeholder Pension is a type of personal pension that is designed to be low-cost and flexible. It’s suitable for those who may not want to commit to larger contributions and want to keep things simple. 

Stakeholder Pensions have a maximum fee cap, ensuring they don’t eat into your savings too much. They’re easy to set up and can be a great option for someone just starting to save for retirement.

Self-Invested Personal Pensions (SIPPs)

A Self-Invested Personal Pension (SIPP) gives you more control over how your money is invested. If you’re comfortable making investment decisions and want to choose from a wider range of assets, a SIPP could be ideal. 

However, keep in mind that SIPPs generally come with higher fees, and the risk is yours to manage. It’s a good choice if you’re looking for more flexibility and are willing to actively manage your fund.

Understanding your needs

By understanding the different kinds of pensions and what they offer, you can make informed decisions that will suit your personal situation. 

Bear in mind that unless you’re going to rely solely on a state pension, the key is to start saving as early as possible, whether that’s through a DC scheme or a SIPP. Every little bit you save today can make a big difference in your future financial security.