A Guide To The Different Types Of Pension Learn about the different types of pension to help work out which is best for you.

What is a pension?

A pension is a good way to save money for when you retire. It’s a pot of money you, your employer or the Government pays into.

What's also great about it is the taxman doesn't touch it, meaning a more comfortable retirement plan for you.

At retirement, you can draw money from your pension pot or sell the cash to an insurance company in return for a regular income until death. This is called an annuity.

Why do I need a pension?

A pension is an easy way to get the most out of the money you earn. You may not have the money in your hand straight away, but it’s a long term investment plan everyone should think about early in their careers. Here are reasons to invest in a pension:

1. The Government helps to top up your pension pot.

2. If you're employed, your employer will contribute.

3. Putting into a pension early on will help you to live well when your older.

Pension arrangement categories

Personal pension arrangements

This is where an individual takes out a policy in their own name to provide an income in retirement.

Pension arrangements organised by employers

Providing employees with an income in retirement.

State pensions

Consisting of two elements - the basic state pension and the State Second Pension or S2P (previously called the State Earnings Related Pension Scheme or SERPS).

What are the types of pension?

1. Final salary pensions

2. Private pensions

3. Standard pensions

4. Stakeholder pensions

5. Self-invested personal pensions (Sipps)

6. State Pensions

Final salary pensions are also referred to as defined benefit schemes. These are largely funded by employers, although staff sometimes have to pay into them.

With this type of pension, you can get a percentage of your final salary before retirement, or when leaving a company, as an annual income.

The percentage will depend on how long you’ve worked for that particular company. There is normally an 'accrual rate' set by your employer as a fraction of your final salary.

1. Final salary pensions

Private pensions are pensions that you contribute to yourself. There are many types you can look to invest in, some more riskier than others.

2. Private pensions

This is where you and/or your employer make regular monthly payments into a pension fund. The money is then invested with a pension company until you reach your retirement age where you are then paid out each month.

3. Standard Pensions

These are similar to standard pensions, but have low and flexible minimum contributions, capped charges and a default investment choice so you don't have to make the decision where to put your savings.

4. Stakeholder pensions

These pensions allow you to choose exactly where you invest your money.

Investors prepared to look for a scheme themselves can run a Sipp quite cheaply. These however, can be a more riskier option to go for.

5. Self-invested personal pensions (Sipps)

A state pension is where you get a small pension from the Government when you hit the state retirement age. The basic state pension is currently £110.15 a week.

You build up entitlement to the state pension by paying national insurance throughout your working life.

If you have a complaint about your state pension, you can get in contact with The Pension Service (part of the Department for Work and Pensions).   

6. State pensions

How Do I Get A Pension?

Auto Enrolment Pensions

If you work for a company, a pension could already be set up for you. Beginning in October 2012, employers are being forced to offer pensions, starting with larger firms. The roll out is gradual with everyone eventually being enrolled by 2018.

You'll be automatically enrolled into a workplace pension if you are:

Employed (this does not apply to the self-employed).

Aged 22 or over. Under the state pension age, which is

currently 65 for men and 61 and five months for women, although this is gradually rising to 65 by 2018.

Earning more than £9,440 a year.

If you decide to opt out, tell your company's HR department or whoever arranges your pension. You will be automatically re-enrolled every three years with the option to opt out each time.

Personal pension arrangements

If you’re looking for your own pension, there are hundreds to choose from and some research is needed in order for you to get the best deal.

If you do not know too much about finance it’s usually best to get advice from an independent financial advisor who will be able to give you good advice.

I have a pension set up. What happens now?

Pay, check and monitor your pension plan

If you already have a pension plan in place you should:

1. Continue to pay National Insurance.

2. Pay into your pension.

3. Decipher exactly what's coming and how much you will be paid when you retire.

4. Keep a close eye on your fund and review it at least once a year. If you feel that your investment could be in a dangerous tailspin, be prepared to move your pension money into other investments. 

Events that may affect your pension

Certain life events may affect what happens to your pension savings and the amount of money in your pension pot. These events include:

Leaving your job Transferring your pension pot to another

scheme Being unable to work because of ill health Divorce Being made bankrupt

What happens when I reach retirement?

Once the money is in a pension, it can't be withdrawn as and when you feel like it. You cannot move it until you're at least 55 when you can take 25% of it as a tax-free lump sum with the remainder to provide a taxable income for the rest of your life.

If you get approached before you're 55 and get told you can take more than 25%, it's a scam known as pension liberation.

What if I have problems with my pension?

Complaining about your pension scheme

If you're concerned there might be something wrong with your pension scheme or the way it's managed, there are organisations that can help.

It's a good idea to get advice before taking any action.

Complaining against pension arrangements organised by employers

Complaints about Small Self-Administered Schemes (SSASs), Executive Pension Plans (EPPs) and Group Personal Pension Plans (GPPs) are considered by the Financial Ombudsman Service.

You can make a complaint against pension arrangements organised by employers if you feel the advice given to start a pension scheme was unsuitable, the benefits paid have been incorrectly calculated or misrepresented, or the money invested in the pension scheme has tied up capital inappropriately.

Complaining about the management or ongoing administration of pension arrangements

If you feel you have suffered personal injustice, hardship or financial loss because of the action or lack of action of a particular organisation, you can make a complaint against them.

You must show that you've tried to resolve your dispute with the company in question before taking your complaint any further and you'll need to provide written evidence of this. These types of complaint should initially be referred to the Pensions Ombudsman.

If your complaint is made against an independent financial adviser (IFA) the pensions complaint should be referred to the Financial Ombudsman Service.

Need more information?

If you feel you need additional advice and assistance, you can also contact The Pensions Advisory Service who can provide advice on a range of pension issues.

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