There are three main types of pensions:
- State pension
- Workplace pension
- Private or personal pension
What is a state pension?
A state pension is a type of pension you can claim from the government once you’ve reached the state pension age. The state pension age rose in 2020 to 66, and the government have set a timetable for continued rises in future.
The state pension will currently give you a maximum of £185.15 per week, but not everybody will get the full amount. The amount you receive from your state pension depends on the number of qualifying years, e.g. the number of years you paid national insurance.
What is a workplace pension?
Workplace pensions are organised by your employer, who most commonly choose a provider to run the pension scheme for them.
You can choose how much of your salary to contribute to your workplace pension. The money then gets taken automatically from your payslip. Your company will then contribute at least 3% or may even match your contribution (up to a capped limit set by them).
Depending on which scheme your employer runs, you will receive some tax relief for paying into your pension. Either the government will reimburse your pension provider 20% of the contribution which goes straight into your pension pot, or your contribution will be taken from your overall salary pre-tax, meaning you will pay less income tax overall and receive the relief by having more take-home pay.
What is a personal pension?
Also known as a private pension, personal pensions are a pension you set up yourself and are often used by the self-employed or by those who want to save more than their workplace pension. As with an employee pension, you benefit from tax relief on your contributions.
As with workplace pensions, the money that you put into your personal pension is invested into different assets by the pension provider you choose to go with. It’s up to you to choose how you want to pay into your pension, whether that’s by monthly payments or lump sums.
What is a self-invested personal pension?
A self-invested personal pension (SIPP) is very similar to a personal or private pension, but you have more say in what and where your contributions are invested in, and there is a wide range of assets to choose from, such as company shares to commercial land.
Because of the wider range of investment choices, it’s recommended that you seek advice from a qualified financial adviser rather than manage it yourself, and that way you will be more protected if things go wrong.
What is a defined contribution pension?
In basic terms, a workplace or a personal pension are mostly commonly a type of pension called a defined contribution pension. All this means is that the money you contribute is invested into different assets, and the value of your pension when you are due to retire is based on how well those investments have performed.