Types of UK pensions

Which one is right for you?

When considering the provisions you have for retirement, the different pension options in the UK may seem daunting. You may be thinking; which one is best, which one is right for me?


You may also be surprised to know that it’s not always a case of choosing between the different types of pensions, and in fact for some people, utilising all three, could be most beneficial. We will aim to explain the three main types of pensions in the UK and how they complement one another.


State pensions are probably the most well-known. They are based on your national insurance contributions, for which you usually need a total of 30 qualifying years, to receive the full entitlement, at state pension age. Contributions can be made automatically if you are working, via credits if you are receiving certain benefits or alternatively you can make voluntary contributions. Most people’s contributions will be taken automatically from their salary. Upon reaching state pension age you can choose to start receiving your weekly entitlement or alternatively you can defer taking your state pension to a later date. The current weekly state pension for someone who is eligible for the full entitlement, is £137.60. For many this is significantly less than what they were earning during their working life and would not accommodate the standard of living they desire in retirement. If you feel that this would not be enough to sustain your retirement, you then may need to look at one or both, of the other pension options available to you.


All employers in the UK are now required to provide a workplace pension scheme to their employees. You may have heard of this referred to as ‘automatic enrolment’. For most this is very desirable, as not only do you make your own contributions, but so does your employer and additional money will be added by the government in the form of tax relief. For example, if you pay £40 into your workplace scheme, your employer will add £30 and you will receive an additional £10 as tax relief, meaning a total of £80 is paid into your pension. In contrast if you were to save £40, only £40 is paid is paid into your savings account. However, it should be noted that you can choose to opt-out of auto enrolment if you wish.


Most companies now provide what are known as ‘defined contribution schemes’ as is described above, however ‘defined benefits schemes’ also exist, despite reducing in popularity over the years. In many cases you may have several workplace pensions due to changing employers throughout your career and these may be a combination of defined benefit and defined contribution schemes. The value of a defined contribution pension is based on the amount contributed; a defined benefit pension is not. Instead, the amount you are paid is based on how many years you were a member of your employer's scheme and the salary you were earning when you left or retired.


As was the case with the state pension, you may also find that your workplace pension will still not provide you with the level of income you desire in retirement. This brings us on to the final type of pension available in the UK which is Personal Pensions. These can come in many forms such as Self Invested Personal Pensions (SIPPS) or Stakeholder pensions for example. They are essentially, defined contribution schemes and work in a very similar way. For most, any contributions made are entitled to tax relief and therefore they can be a very useful vehicle in which to save for one’s retirement. If you want to save above and beyond your state and workplace pensions, then a personal pension can be a really good option.


It should be noted that pensions are not the only type of arrangement that can be used to fund your retirement, there are also options such as lifetime ISAs etc. Pensions are however the most popular form of retirement savings in the UK and from the tax relief alone it is easy to see why.


Now that we have explained the different types of pensions and how they can all be used together, you may be wondering if your current arrangements will be suitable for your retirement. It is important to regularly review your pensions as well as ensuring you have effectively planned for your retirement. Our financial advice team would be more than happy to review your current arrangements and provide you with a projection of the level of income they may generate. If you would like us to help you successfully plan for retirement, ensuring that you have the standard of living you desire, you can get in touch with one of our Financial Advisers today, on 020 3137 3840.


Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. Although endeavours have been made to provide accurate and timely information, we cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions.

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