What are the different types of pensions?
Your pension is your way to save for retirement. Find out about the different types of pensions available in the UK in our guide.
Key takeaways
The three main types of pension are defined contribution pension, defined benefit pension, and a state pension
Other types of pensions include workplace pensions, personal pensions, and self-invested personal pensions (SIPPs)
Each form of pension has its own advantages and risks and the pension you get will depend on your personal circumstances
What is a pension?
Pensions are a long-term savings and investments plan. Money is built up which you can draw on in later life – usually after you stop working.
If you’re an employee working for a business or company, you’ll usually contribute to your pension through a workplace pension scheme.
If you work for yourself or choose to set up a pension outside of your employee pension, then you could start a private pension instead.
There is also the state pension, which is a regular payment from the UK government that you can claim once you reach state pension age.
It is based on a few factors including the National Insurance contributions you’ve made throughout your working life.
What are the three main types of pension?
There are three main types of pension plans:
Pension type | How does it work? | Main advantages | Risks |
|---|---|---|---|
Defined contribution | Built up through contributions from you and your employer (if it’s a workplace scheme), plus government tax relief | - 25% tax relief top-up for basic rate taxpayers - Employer contributions in workplace schemes - Up to 25% tax-free lump sum from age 55 (57 from 2028) - Potential for investment growth | - Poor investment performance may reduce your pension pot - Access generally only from age 55 (rising to 57 in 2028) |
Defined benefit | Usually a workplace pension; pays a guaranteed income based on your salary and length of service | - Guaranteed income for life, usually inflation-linked - Often includes added benefits like ill-health or death-in-service payouts | - Very small risk the scheme could collapse (though the Pension Protection Fund offers some protection) |
State pension | Paid by the government once you reach state pension age, based on your National Insurance record | - Entitlement starts after just 10 years of NI contributions - Increases annually under the triple lock (earnings, inflation, or 2.5%) | - Less than 35 years of NI may mean a reduced pension - Often not enough on its own for a comfortable retirement - State pension age is rising |
What are the other types of pension plans?
Workplace pensions
If you’re over the age of 22, work primarily in the UK and earn more than £10,000 a year, you’ll be auto-enrolled into your company’s workplace pension.
Most workplace pensions are defined contribution schemes, with the total minimum contribution under auto-enrolment being 8% of qualifying earnings (including a minimum 3% from your employer). You’ll also receive tax relief on top from the government.
Defined contribution pensions are generally invested in stocks and shares, and the amount you will get back in retirement will depend on the following factors:
How long you have saved for
How much you pay into your pension pot
How much your employer pays in
How well your investments have performed
What management charges have been levied by your pension provider
Often, you'll be able to choose from a range of funds to invest in with varying degrees of risk, however, you should be aware that the value of investments might go down as well as up.
Personal pensions
Personal pensions, also known as private pensions, are pensions set up privately by you rather than by your employer. They’re also usually defined contribution pensions (see above), with government tax relief on any money you pay in.
Money you pay into your personal pension is put into funds, such as stocks and shares and equity funds, by the pension provider. You can choose the type of funds you invest in, whereas workplace pensions are normally more restrictive.
Unlike the state pension, you can also take a lump sum of up to 25% of the value of your pension pot tax-free when you reach 55 (expected to increase to 57 in 2028).
Self-invested personal pensions (SIPPs)
If you feel confident navigating the stock market, you might want to consider a self-invested personal pension, known as a SIPP.
These schemes offer a wider and more detailed range of investment options than standard personal pensions. These might include high-risk investments that you have to choose yourself, without advice.
Many providers will allow you to invest in ethical investments (ESG funds) so you can be sure that your money is going towards companies that align with your values.
However, a SIPP involves more hands-on management so you’ll need to keep track of your funds. A SIPP will also typically have higher charges, which can impact on your overall return.
Which type of pension is right for me?
All pensions offer a chance to save and invest money for when you are no longer working, so for most people some form of pension is essential in retirement.
The type of pension you get will depend on your personal circumstances. While defined benefit pensions are now very rare, it’s still usually the best option to take advantage of your workplace pension scheme if you’re employed.
This is because not only is it tax-efficient, but your employer is likely to be obliged to contribute.
If you’re self-employed and run your own business, a private pension is likely to be your only option. But this has advantages too. It also has tax benefits and is likely to give you more options on where the funds are invested.
Other useful guides
We have a range of guides to help you navigate your pensions decisions:
Find a private pension with our partner MoneyFarm
Setting up a private pension can be quick and simple online, but it's a good idea to take some time to do your research first. Getting expert and impartial advice is a good idea if you're not a confident or experienced investor, although this will come with an added cost.
We have teamed up with our chosen partner MoneyFarm to help you choose the right private pension plan. They can help you combine your old pensions into one, easy-to-manage plan and they will choose the best investment plan for you, using funds from the whole of the market.
You will also get a dedicated Pension Adviser to answer any questions. If you need help tracing a lost pension or want them to check for any penalties or benefits, they can also do that for you, for a one-off fee of 1% of your pension value (taken at transfer from your pension pot).
Capital at risk. Past performance is not a guide to future performance. This website does not constitute personal advice. If you are in doubt as to the suitability of an investment please speak to a financial adviser. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.
MoneySuperMarket.com Ltd is an Introducer Appointed Representative of MoneyFarm, which is authorised and regulated by the Financial Conduct Authority. FCA number 596398. Registered in England & Wales, Company Number 07731925. Registered office address: Norwest Court, Guildhall Street, Preston, PR1 3NU.
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