What types of pensions are there?
When you retire, you will want to maintain a comfortable lifestyle, so – unless you can guarantee a large inheritance or windfall – then you will need a secure income for the rest of your life. A well-prepared pension plan which is regularly reviewed should go some way to providing you with a reasonable level of income in your retirement.
What types of pensions are there?
There are several types of pension, and they all work in different ways. What's most important is that you understand that a pension is there to help you save money for retirement. Let's look at the types of pension available - they fall into three main categories.
First, there's the State Pension
The State Pension is a regular income that’s paid to you by the Government when you reach State Retirement Age. The income you receive is dependent on having paid a certain level of National Insurance over your working life. Rules around the State Pension – and how much you receive – have changed following the introduction of the new State Pension in April 2016.
These rules are likely to continue to change, so it’s always best to look at the Gov.uk website to find out exactly what you are entitled to, and when.
Next we have workplace pensions
A workplace pension is a way of saving for your retirement that's arranged by your employer, it's likely that you'll be offered one of the following:
- Defined benefit schemes – these pay you a guaranteed income each year when you retire. The amount you get depends on your pensionable service, pensionable earnings and an accrual rate.
- Defined contribution schemes – these are also known as a money purchase scheme. The money that you pay into them is invested by a pension provider chosen by your employer. The amount you get when you retire usually depends on how much has been paid in, how long you've been paying in and how well the investment has done.
Since October 2012, employers in the UK have been obliged to operate a new system of automatic enrolment for workplace pensions. So by 2018 most employees will automatically be members of a workplace pension scheme. In many cases, employers will use a multi-employer scheme, such as NEST, NOW or The People’s Pension.
There are also group personal pensions, which are a type of defined contribution pension. Group personal pensions are a collection of pensions where members of these schemes build up a personal pension pot, which they then convert into an income at retirement.
Then we have personal pensions
Personal pensions are savings schemes that you arrange yourself, or with the help of a professional adviser. You pay in sums of money – and usually have some control over the decisions being made (about where to invest the money).
One type of personal pension is a stakeholder pension. This is a form of defined contribution personal pension and is relatively straightforward. They have low and flexible minimum contributions, capped charges and a default investment strategy if you don't want too much choice. Some employers offer them, but you can start one yourself.
A self-invested personal pension (SIPP) is another type of personal pension. A SIPP is a pension 'wrapper' that holds investments and gives you more flexibility with the investments you choose. You can start to draw your retirement income from your SIPP when you reach 55 years old. It's a little more complex to set up, and you need to be more certain of the way you feel about managing a portfolio of investments over time (although a professional adviser can give you some support with this).