Pension types available to savers in the UK
Your pension is your way to save for retirement. Find out about the different types of pensions available to you in our guide
What is a pension?
Pensions are a long-term savings 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 your salary alongside your employer, through a workplace pension scheme. In our guide we will take you through the other types of pension plans you can use to save for your retirement.
What are the three main types of pensions?
There are three main types of pension plans:
Defined contribution pension
Defined contribution pensions are the most common type of pension plan. This type of pension is built up through the contributions you make over the years – and any contributions from your employer (if it is a workplace scheme), plus tax relief added by the Government to pension savings. Defined contribution schemes can be workplace or private pensions.
Your pension pot’s size will depend on how much was paid in and also how well the underlying investments have performed. Most defined contribution pension schemes will be invested in a range of UK and global equity funds.
Investing your money will always carry a level risk, so some pension schemes will move your money into lower-risk investments, such as bonds and cash, as you near retirement age. You can ask your provider to do this if this doesn’t automatically happen. You can access your defined contribution pension when you’re 55, this is expected rise to 57 in 2028.
Defined benefit pension
Sometimes called a final salary pension, a defined benefit pension is almost always a workplace pension. This is because the amount you receive in retirement is based on how long you worked for the employer and your level of salary. Many employers have now closed their final salary pension schemes to new workers due to their high costs.
The state pension is the pension paid to you by the government once you reach the state pension age. Your state pension age will depend on when you were born. The amount of money you’ll get in your state pension will also depend on your National Insurance contributions. You can find out your state pension age by using the GOV.UK website.
What are the other types of pension plans?
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, and your workplace must provide a 3% minimum contribution. You can then determine how much you contribute and 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, if anything, your employer pays in
How well your investments have performed
What management charges have been taken out of your pot 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, 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, which you often can’t do with workplace pensions. 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 could offer a higher payout if the investment returns are bigger.
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.
What pension can I have if I'm self-employed?
Self-employed workers often need to save more than their employee counterparts to get the same retirement fund – as they won’t receive employer contributions.
If you're self-employed, particularly sole traders, you won’t usually have access to a workplace pension. This is why many self-employed workers set up private pensions, SIPPS or save into ISAs, such as the stocks and shares for their Lifetime ISA.
However self-employed people are still entitled to the State pension as long as they’ve made enough qualifying National Insurance contributions. While people who work for others, have their employers paying into their pension, self-employed people could have their business contribute to their pension as long as it’s set up as a limited company.
Should I open a personal pension?
Opening a personal pension is entirely up to you. Some people may feel their retirement needs will be taken care of with their workplace pension and also with their state pension. Here are some factors to consider when deciding to open a personal pension:
Advantages of personal pensions:
Tax relief: With your personal pension, the money you save into your pension will also benefit from tax relief. The tax benefits will also continue when you retire. When you reach retirement age (currently 55) you’ll be able to take 25% of your pension pot as a tax-free lump sum. The rest of your pension funds will be paid to you as income and taxed at the normal rate depending on your annual income.
Available to everyone: Personal pensions aren’t dependent on your employment status. So you can open one whether you’re employed, self-employed or unemployed. You aren’t the only one who can pay into your personal pension – anybody else can too.
You can also pay into other people’s personal pensions including your children, so you can give them a head start on their financial future.
Compound interest: The earlier you begin paying into your personal pension, the more you’ll benefit from compound interest. The payments you make into your pension will benefit from tax relief and you’ll also make returns on your investment. This is how it works:
Year one: You benefit from interest returns on your initial contribution.
Year two: You earn interest on the initial contribution and the first-year investment return.
Year three: You earn interest on your original contribution and two years of returns you’ve accrued. These gains will keep on growing as long as you consistently make tax-free contributions.
Disadvantages of personal pensions:
Investment risks: With your personal pension, you can invest in bonds, stocks and shares and equity funds. As always with investments, the value of your investment can fall as well as rise. So you could lose money if your investment doesn’t perform. Although because your pension is essentially a long-term investment plan, even if your investment does fall, the long-term gains can often outweigh any losses.
It can be complicated: Pensions aren’t always easy to understand and they come with a lot of rules and regulations you may be unaware of. That’s why it’s good to work with experts who can explain to you clearly what your choices are. Our partner, Profile Pensions, have a team of pension advisers you can speak to.
Can’t access until you’re 55: You won’t be able to access your personal pension until you’re 55, this is expected to rise to 57 in 2028. If you do choose to do so before that age, you run the risk of costly fees and charges.
Other useful guides
We have a range of guides to help you navigate your pensions decisions:
Pension contributions explained
How do I open a private pension?
Setting up a private pension can be quick and simple online. But it is a good idea to take some time to do your research first. You don’t need a financial adviser or broker to arrange a private pension. But 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 Profile Pensions to help you choose the right private pension plan. They can help you track down and combine your old pensions if you decide it's in your best interests to do so and help you choose the best investment plan for you, using funds from the whole of the market. You will also get your own dedicated pension adviser to answer any questions you have.
Capital at risk. 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 Profile Pensions, a trading name of Profile Financial Solutions Limited 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.