Saving money for your retirement is one of the most important investments you will ever make, so it’s wise to understand the three main types of pension schemes.
All three options allow you to make contributions into a pension fund during your working life, which you can then live off when you retire.
Your later life should be a time to enjoy a well-earned rest after decades of work, but you need to choose the right pension now to reap the benefits later. Find out below if you qualify for one or more of the three pension types.
1. Workplace pensions
Under recent legislation, all companies are now required to offer their staff access to a workplace pension. All eligible workers should have been automatically enrolled in the scheme by February 1, 2018.
There are two main types of workplace pension:
Defined benefit (or final salary)
The retirement benefits you receive are based on your earnings and the length of service with the employer. The rules of the scheme define what counts as earnings and also the rate at which benefits are accrued. For example, earnings may exclude overtime or bonuses and the rate may be based on your finishing salary or your career average earnings.
Defined contribution (or money purchase)
The Government has set minimum levels of contributions that must be paid to the workplace pension scheme by you and/or your employer.
These contributions are invested in a managed pension fund. The benefits you receive will depend on:
- The amount you and your employer have paid in
- The length of time that it has been invested
- How the investments have performed over this period
2. Personal pensions
Personal pensions are often used by people who are not working, self-employed, or not eligible to join their company’s workplace pension scheme. Personal pensions are always defined contribution arrangements, but there is no Government-set minimum contribution level.
There are several different types of personal pension. Not all of these offer the latest pension freedoms that allow flexible access to your savings.
Retirement annuity contracts (section 226)
Available before July 1988, RACs are a type of pension scheme for the self-employed and workers not offered a workplace pension.
A generic term for pensions that became available to all individuals after July 1988. Older versions may have high or non-explicit charges and it can sometimes be difficult to see exactly how your pension fund is performing. However, many modern personal pensions have lower charges than stakeholder pensions (see below) and can offer flexible access.
In an effort to simplify pensions and reduce charges, the Government introduced stakeholder pensions in 2001. These pensions had to meet minimum standards that capped charges and allowed flexibility – but not necessarily the flexible access granted to other pensions from April 2015.
SIPPs (self-invested personal pensions)
SIPPs offer a variety of investment options and can offer greater flexibility. While many allow their financial adviser to manage their SIPP, some people with experience of the financial markets prefer the autonomy to manage the investments held – accepting the responsibility that entails. For example, some SIPPS allow investment in single company shares and individual commercial properties, or more esoteric investments such as storage units and overseas forestry operations.
3. State Pension
The State Pension is the pension you get from the Government when you reach State Pension age. The amount you receive depends on your National Insurance contribution record.
If you reached State Pension age on or after April 6, 2016 you will get the new State Pension payment, which is a maximum of £175.20 per week.
Depending on your circumstances, you will qualify for at least one of the pension types explained above. Even if you already contribute towards one of these types of pension plans, you may wish to invest in more than one. Make a sound investment now and find out later what the golden years really mean.
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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 contact one of Profile Pensions’ advisers. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.
Telegraph Media Group Limited 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
Information correct at date of publication.