Understanding the different types of pensions

Types of pension

Updated

December 9, 2021

Key takeaways

There are three main types of pensions in the UK, each working slightly differently but all designed to help you save for the future.*A personal pension is one you set up yourself — ideal for the self-employed or anyone wanting more control.*A workplace pension is arranged by your employer, with contributions from both you and them.*The State Pension is paid by the government once you reach State Pension age, based on your National Insurance record.

Which pensions do you have?

There are a few different types of pensions in the UK. But the main ones you need to know about are workplace pensions, personal pensions and the state pension.

When it comes to understanding which pensions you might have, the answer could be all of them.

But for each type of pension, how they work, what you get and when you get it, is different.

Before diving in it’s important to know that pension and tax rules can change and depend on your personal circumstances. So before making any decisions, check how anything mentioned below will apply to you.

‍

Main types of pension

Here’s a brief summary of the main pension types, breaking down how they work, what you get and when you get it.

‍

If you need to review the basics, check our guide on what is a pension.

‍

Personal pension - a pension pot you build yourself

You are in charge of setting up a personal pension and adding money to it. The government tops up your contributions, up to a certain amount, through tax relief.

The main reasons people set up personal pensions are to:

Save more and supplement a workplace or the state pension
Start saving for retirement if self-employed
Combine old pensions and keep them under one roof
Make their own investment decisions

‍

Personal pensions
What is it?	A pension pot you build yourself
Types of personal pension	Personal pension	Stakeholder pension	SIPP (self-invested personal pension)
How does it work?	Personal pension plans tend to have restricted investment options that you choose from. Each ready-made portfolio is designed with a specific investment goal. For instance, this could be a portfolio of sustainability focussed investments, or one tailored to a specific retirement date. You or perhaps your financial advisor will choose your portfolio, but a fund manager is in charge of what goes in it.	Stakeholder pension plans work in a similar way to personal pensions but they also have to meet certain criteria set out by the government. The criteria include things like cost limits and a minimum contributions level. You or a financial advisor will choose your portfolio but a fund manager is in charge of what investments go in it.	SIPPs tend to offer a wider choice of investment options. You control what your pension is invested in. You can build your own portfolio of stocks or other assets. But you can also select ready-made investment options too, like ETFs and investment trusts. You can also keep a closer eye on fees - knowing exactly what you're paying and why.
What do you get?	How much you get all depends on what you have contributed over time and how well your investments have performed.
When do you get it?	You can’t access money paid into a personal pension until you reach age 55 (or 57 from 6 April 2028)

‍

Workplace pension - set up by your employer

Workplace pensions are set up by your employer which means that every new job likely brings with it a new pension.

The two main types of workplace pension in the UK: defined contribution schemes and defined benefit schemes (or DC and DB to the cool kids).

But we should start by saying that defined contribution pensions are much more common.

DC pensions are built up over time through regular contributions by both you and your employer while you are employed.

With a DB pension, on the other hand, only your employer makes the contributions, and it will result in a guaranteed income when you retire.

Workplace pensions
What is it?	Provider by your employer.
Types of workplace pensions	Defined contribution (DC)	Defined benefit (DB)
How does it work?	This is a pension pot that’s based on how much is paid in. Your employer must now automatically enrol you into a pension when you start work. Both you and your employer tend to contribute to this pension pot over the time that you work there. There’s a minimum contribution level set at 8% of your salary and your employer must pay at least 3% of this. Like a personal pension, you may be able to choose what your pension is invested in. The government tops up your contribution through tax relief.	This is a pension pot based on a few things like final salary and how long you’ve worked at the company. You do not need to contribute to this pension, only your employer does. You’re paid a secure income for the rest of your life once you reach the required retirement date. The level of income you get tends to be based on how many years you’ve worked with the company and your salary. DB schemes are rarer these days. But you might have one if you’ve worked for a big employer or the public sector.
What do you get?	How much you get all depends on what you have contributed over time and how well your investments have performed.	Your employer will pay you an income in retirement that's based on a few things like your final salary and the number of years you've worked there.
When do you get it?	Most workplace pension schemes set an age when you can take your pension, usually 60 - 65. In some circumstances, you can take your pension early. The earliest is usually 55.

‍‍

‍State Pension - provided by the government

The State Pension is provided by the government as long as you are eligible and you’ve reached State Pension Age.

And while any regular income in retirement is not to be sniffed at, it’s important to remember that the state pension alone is unlikely to keep everything ticking over.

‍

The State Pension
What is it?	Provided by the government.
How does it work?	The State Pension is run by the government, you do not pay into this. You get the state pension when you reach State Pension Age and if you meet the necessary criteria e.g. required national insurance contributions.
What do you get?	How much you get depends on a few things like personal income and circumstance but one of the main things is your history of paying national insurance. At the moment if you qualify for the full new state pension, you’ll get £179.60/week. But this will change over time.
When do you get it?	State Pension Age is currently 66 but that’s set to rise to 67 by 2028 and to 68 by 2039.

Who can get the State Pension?

A new State Pension came into effect on 6 April 2016 for people who’ll reach state pension age after this point (men born on or after 6 April 1951 and women born on or after 6 April 1953).

The rationale was to make it simpler and clearer for everyone to understand the benefits they could get.

An important thing to know about the State Pension is that it changes over time, both in terms of the value of benefits and the age at which you can access these.

Given this, it’s best to check your state pension age and forecasted state pension directly on the government’s site.

To get any State Pension you’ll need at least 10 qualifying years on your National Insurance record and to get the full State Pension you’ll need 35 years.

💡 What is a ‘qualifying year’?

Generally, a qualifying year for the State Pension can be made up through National Insurance contributions made whilst working (employed or self-employed), National Insurance credits and any voluntary National Insurance contributions.

For the full ins and outs on national insurance contributions and qualifying years, it’s best to check with the government directly.

Types of pension FAQs

How do you know what pensions you have?

When it comes to finding old workplace or personal pensions it’s best to follow the paper trail where possible. If you think you might have old pensions that you need to find, start with our guide on how to find old pensions.

‍

Can I transfer my pension?

You can transfer pensions, and Freetrade’s SIPP could be a useful account for you to combine any old pensions in.

You can transfer the below types of pensions to a Freetrade SIPP:

‍Self Invested Personal Pension (SIPP)
Individual Personal Pension (IPP)
Stakeholder Pension Plan (SHP)
Contract-Based Workplace Pension Plan*
Trust-Based Workplace Pension Plan*

‍* Subject to current plan rules. Some workplace pension plans cannot be transferred while still active.

Before transferring a pension it’s important to understand if you’ll be better off or not by transferring.

Think about:

Any difference in ongoing costs
Whether you’ll lose any benefits your current scheme offers, such as guarantees (which offer you a certain guaranteed income for life)
If you’ll be charged anything for leaving your current provider

‍

Take control of your retirement savings with a Freetrade self-invested personal pension (SIPP). Start a SIPP today and contribute regularly, or transfer old pensions to one single pot which you can grow and manage yourself.

‍

Important information

This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.When you invest, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.