A pension is a contribution of funds made during an individual’s employment years. The individual will contribute as will another party or parties. This money is then paid back to the individual once they retire through periodic instalments.
There is a UK Government pension, also known as the state pension, which you receive once you reach retirement age (subject to change), and there are workplace pensions and private personal pensions that pay out as agreed with the pension provider. You can find many types of workplace or private pensions, which differ on their structure and how they pay the individual.
Types of pensions
Some of the most common types of private pensions are:
- Defined contribution pension schemes
- Defined benefit pension schemes
- Stakeholder pensions
- Group personal pensions
- Self-invested personal pensions (SIPPs)
- Multi-employer pension schemes
- Self-employed pensions
Some of these products cross over into other categories, which can add confusion for people searching personal pension options. We’ve explained some of them in further detail.
Personal pensions are pension schemes that you opt into independently rather than through your workplace. However, some employers use the same pensions instead of standard workplace pensions. The money put into these pensions are usually used as capital within investments.
Defined contribution pension schemes
A defined contributions pension is a private pension where you and your employer make contributions to your pension pot. The pension provider then invests the funds into various investment products, typically stocks and shares. Your pension fund can fluctuate depending on how investments perform. It’s good practice for funds to be moved to low-risk investments as you get closer to retirement.
Defined benefit pension schemes
A defined benefit pension scheme is also contributed by the individual and their employer. The amount paid back is determined by the scheme’s rules only, usually calculated by your average salary and years in employment. There is a minimum amount you must receive each year of retirement.