When planning for retirement, it is important to understand the different types of pensions available. In the UK, there are several types of pensions that you can contribute to, including state pensions, workplace pensions, private pensions, stakeholder pensions, standard personal pensions, and self-invested personal pensions (SIPPs). This article will provide an overview of each of these pension types.
The State Pension is a regular payment from the government that most people can claim when they reach state pension age, which is currently 66. The State Pension is based on your National Insurance contributions and the number of qualifying years you have accumulated. The full new State Pension is Â£185.15 per week, although this could be lower depending on your National Insurance contributions.
If you have gaps in your National Insurance record, you may be able to make voluntary contributions to fill them. The amount you need to pay for voluntary National Insurance contributions depends on your age and how many years of contributions you need to make up. The earlier you make the contributions, the less expensive they are likely to be. If you’re considering making voluntary contributions, it’s a good idea to check your National Insurance record first to see if you have any gaps that you can fill.
Workplace pensions are set up by employers for their employees. They are also known as occupational pensions. Workplace pensions are divided into two types: defined benefit schemes and defined contribution schemes.
Defined Benefit Schemes
Defined benefit schemes, also known as final salary or career average schemes, guarantee a certain level of pension income based on factors such as salary and length of service. This type of pension is less common today as they are expensive for employers.
Defined Contribution Schemes
Defined contribution schemes, also known as money purchase schemes, offer a retirement income based on the amount of money someone has contributed to the scheme and the performance of their investments. These schemes can be set up by employers for their employees, or individuals can set up their own personal pension plans.
In addition, the UK government has recently backed a bill aimed at expanding pension saving to young and low earners, which could lead to more people having access to workplace pension schemes in the future. These schemes can offer a tax-efficient way to save for retirement, as contributions are deducted from pre-tax income, and the government also provides tax relief on contributions made.
If you’ve had multiple workplace pensions throughout your career, you may want to consider consolidating them into a single pension plan for easier management and potentially lower fees.
Private pensions are pensions set up by individuals who want to save for their retirement independently of their workplace pension. There are three types of private pensions: stakeholder pensions, standard personal pensions, and self-invested personal pensions (SIPPs), which we explore in more detail below.
Stakeholder pensions plans offer a simple and low-cost way to save for retirement. They are designed to be accessible to anyone, regardless of their income or employment status. Stakeholder pensions have a cap on charges, which is currently set at 1.5 per cent for the first 10 years and 1 per cent thereafter.
Standard Personal Pensions
Popular among those who’re self-employed, standard personal pensions offer a wide range of investment options and can be tailored to an individual’s specific needs.
Self-Invested Personal Pensions (SIPPs)
Self-invested personal pensions (SIPPs) allow individuals to choose their own investments. SIPPs offer a wide range of investment options, including stocks and shares, bonds, and commercial property. They are suitable for those who are comfortable making investment decisions and want to have more control over their pension.
It’s possible to have both a SIPP and a workplace pension, which explore further in our guide: SIPP Vs Workplace Pension: Can You Have Both?
Each type of pension has its own advantages and disadvantages, so it is important to consider your personal circumstances and goals when choosing a pension scheme. Seeking professional pension advice can be beneficial in understanding the different types of pensions and selecting the right one for your needs.