What is a pension?

A pension is the savings you make to support yourself in later life. You may have received a pension from your employer (or past employers) and you can also set one up yourself to get saving. There are three different types of pension, and you can have more than one kind should you wish to.

Different types of pension

The three different types of pension in the UK are the State Pension, workplace pensions and personal pensions. They vary slightly in what they offer savers, so here’s a brief explanation of each.

What is the State Pension?

The State Pension is essentially a regular payment people can claim when they reach the State Pension age. How much you get depends upon your National Insurance Contributions, with the government determining your pension payments through the credits you’ve accrued throughout your life. 

What is a workplace pension?

Exactly as it sounds, a workplace pension is organised through an employer. Thanks to Auto Enrolment legislation it’s now compulsory for employers to set up a pension scheme for eligible staff, either through their own scheme, a specialist pension provider, or through a government-backed scheme. An employer must put in a minimum contribution to a workplace pension, as must an employee. The government also contributes to your pension in the form of tax relief. You choose how much to pay into your pension and your pension provider claims tax relief from the government and adds it to your pot.

What are personal pensions?

A personal pension is a defined contribution pension, which means the amount you receive on retirement depends on how much you’ve paid into the pot and how well your investments have performed. You choose how much to pay into your personal pension and your pension provider claims tax relief and adds it to your pot.

These are the three types of pension you’ll come across as a saver, but it’s worth noting that pensions can also differ in terms of whether they’re defined benefit or defined contribution. 

What are defined benefit pensions?

Defined benefit pensions – also known as final salary schemes – promise to pay a retirement income based on a percentage of your salary. What you receive depends on how long you spent working for your employer, and how much you were earning at the time you gave up work. Outside of the public sector, these type of pensions are pretty rare nowadays. 

What are defined contribution pensions?

Defined contribution schemes are a type of pension which you (and perhaps an employer) pay contributions into each month. Typically, these contributions are invested into shares or bonds, and the ultimate size of the pension pot depends on how well these perform over time. After the age of 55, you can use a defined contribution pot to buy an annuity, which will then pay you an income for the rest of your life, or you can simply take out your money as you wish (subject to tax). 

Updated: 14th June 2020 

Speak to one of our highly qualified, professional financial advisers for a no-obligation financial planning review. 

You can give our team a call on 0207 868 2891, send an email to admin@halcyonwealth.co.uk or arrange for us to call you using the form below:

Or complete the form below and we’ll aim to respond within 24 hrs.
Next article

We’re very proud of winning this award, for the second year running, which recognises not only the growth of our Network over the past year, but also our continued commitment to providing quality face-to-face advice.

We’ve always known that we have the very best advisers in the market – and we’re delighted that winning this award underlines that. 

If you are unhappy with our service, we have a complaints procedure, details of which are available upon request. If you are unhappy with how your complaint has been dealt with, you may be able to refer your complaint to the Financial Ombudsman Service (FOS). The FOS website is www.financial-ombudsman.org.uk

Halcyon Wealth Ltd is registered in England and Wales. Companies House No. 10311380. Halcyon Wealth Ltd registered office: 68 Lombard Street, London EC3V 9LJ Telephone 0207 868 2891. Halcyon Wealth Ltd (Financial Conduct Authority No. 758949) is an Appointed Representative of Quilter Wealth Limited and Quilter Mortgage Planning Limited, which are authorised and regulated by the Financial Conduct Authority.