Understanding the different UK pension schemes

There are many types of pension schemes available in the UK today. It is important to understand the value and worth of your pensions.

Having a good pension pot scheme will help give you the standard of living you want for retirement. ‘Pension pot’ refers to a type of pension you build up with pension contributions you and/or your employer make -or in the case of the state pension, the Government. Many employers encourage their employees with all kinds of UK pension schemes to get them off to a good start. There is the option to opt out but it’s generally a good idea to contribute towards your pot sooner rather than later.

Types of pension scheme

If we ignore the state pension, there are two types of pension that can be set up in the UK.

Defined benefit or final salary pension schemes

Defined benefit or final salary schemes (also known as career average schemes) give you a retirement benefit based on your salary and length of employment. They are becoming rare to find, and tend to be available from older workplace schemes or public sector schemes.

Defined contribution pension schemes

Defined contribution pension schemes (sometimes called money purchase schemes) build up a pension pot that you typically use to gain a retirement income. You and/or your employer contribute funds to this type of scheme and and those funds are invested. They can be either workplace and personal pensions.

Here at PX we can advise on pension types, but specifically we can assist when you want to transfer your pension from one scheme to another.

Alternative descriptions of pension schemes

There are other ways to describe pension schemes, just to make it more confusing! Let’s look at some of the schemes and their features.

Workplace pensions

This is a pension provided by the employers and the scheme. A workplace pension can be either a defined benefit scheme or a defined contribution scheme – or a something of a hybrid of the two such as the CDC introduced in 2021. Depending on the scheme you’re in, the employer and employee will both make contributions to the pension fund and the amount can be withdrawn by the employee as a pension at retirement.

Personal/Stakeholder pensions

The personal or stakeholder pension is generally independent of your employer, and you pay the whole contribution into the pension scheme you have chosen. You have the choice of selecting the provider and making regular contributions to be withdrawn at a later date at retirement.

Drawdown pensions

Drawdown pensions are a flexible method that allows you to withdraw benefits from a UK Registered Pension Scheme. Your pension savings will be invested and are available to withdraw at retirement. The income you get will vary depending on how the fund or the type of investment has performed. This should be done with the help of a qualified financial adviser

SIPP

The Self-invested Personal Pension is a tax wrapper that holds and controls investments. An individual can deposit their UK pension regularly in this scheme to be withdrawn later at retirement. The wrapper lets you invest in many things from funds and shares to business premises.

There are several pension schemes out there which can be beneficial depending on your requirements. Get the best advice possible to ensure you make the right decision to enjoy your retirement.