A pension is a long-term investment. Its value can go down as well as up and could be worth less than was paid in. Laws and tax rules may change in the future. Your own circumstances and where you live in the UK will also have an impact on tax treatment.
Comparing types of pension plans
Your retirement is probably one of the biggest thing you’ll ever have to save money for. That’s why it’s important to compare your options and choose a type of pension plan that supports your goals and appetite for investment risk. They all have their own benefits, risks and features to think about too.
Our quick and clear guide breaks down a few pension plans to help you better understand each type and to help you decide what’s right for you.
There are two main types of pension plan
Aside from the State Pension, there are two main types of pension plan to choose from, known as Defined Contribution and Defined Benefit (also known as final salary or career average).
In short, Defined Contribution pension plans will pay out based on how much money has been paid into the pot throughout your life, investment growth over time charges paid and how you choose to take your money at retirement.
Alternatively, Defined Benefit pension plans will pay out depending on your salary, the number of years you’ve been working for your employer and the terms of the scheme that you're in.
Defined Contribution (DC) pension plans
Sometimes known as ‘money purchase,’ this is a common type of pension plan. You can open a Defined Contribution pension plan on your own – sometimes called a personal pension plan.
You might also get this type of plan with your employer referred to as a workplace pension plan.
Be it a personal or workplace plan all DC pensions work the same way:
- You, your employer or for some plans, sometimes a third party can open a plan and start paying into it with the aim of building up a pension pot
- The money paid in will be invested, which can potentially give it an opportunity to grow, but there’s no guarantee it will. That depends on many factors including how much is paid in, any charges and the performance of where the money is invested
- Each time you pay money in the government will provide tax benefits. A pension is one of the most tax-efficient ways to save for retirement. You can find out more about how tax benefits work with our Pension Basics guide
- From age 55 (57 from 6 April 2028) you can usually start accessing your pension money through a range of different options. We have a guide on ways to take your money that explains each option. You are normally entitled to take 25% of your whole pension pot as a tax-free lump sum, you can take this as one payment or in stages
So what’s the difference between a Personal Pension, a Self-Invested Personal Pension, a Workplace Pension or a Stakeholder Pension plan? The differences are generally simple:
- The minimums you can pay in
- The investments available
- How payments are made. For most workplace plans this in normally via your employer
- The charges and discounts
What is a Defined Benefit pension?
Commonly known as ‘Final Salary,’ this is a type of workplace pension plan. Defined Benefit pension plans are different from other schemes, as they pay out a specific, secure income for life when you come to take your pension money.
Here’s a quick overview of how Defined Benefit Pensions work:
- Your employer will join you into the company’s Defined Benefit Pension scheme
- Your employer pays into the scheme. They are responsible for making sure there’s enough money when you retire to pay your pension income
- They might ask you to pay in as well, and any payments you make will qualify for tax benefits
- Some workplace pension schemes even pay an income to your partner and dependents when you die
- The amount you get at retirement is based on a few factors, such as how much you’ve earned through the employment, how long you’ve been employed, your age and more. The specific terms of the scheme will also be a factor
This is just a quick overview of how defined benefit pensions work. For even more information, please visit MoneyHelper.
The State Pension
The State Pension is a retirement income paid every four weeks to you by the government once you reach the UK State Pension age. Not everyone is eligible for the full State Pension, so it’s important to know what your personal position is.
You can get a State Pension statement that can show what your entitlement is likely to be. Visit the Government website to see how much you could get.
We have a detailed guide to understanding your State Pension. It’s full of helpful information about how much you could get a week, what the State Pension age is and how to qualify for payments when you reach state retirement age.
Find out more about our different plan offerings
More about pensions
We want to help you get the most out of your pension plan. We have guides, tools, articles and more to help you understand how pensions work and how to keep your savings on track.