All pensions have the same purpose: helping you save for retirement. However, there are different types to be aware of.
Workplace pension
Anyone aged between 22 and the State Pension age, earning at least £10,000 a year from their employer, should be enrolled in a workplace pension automatically.
Employers have been legally required to enrol employees in a workplace pension scheme since 2012 – and the rule has had a significant impact.
According to government data, the number of eligible employees who pay into a workplace pension shot up by 32% between 2012 and 2019.
There are two main types of workplace pension:
- Defined contribution – with a defined contribution pension, both employer and employee make regular contributions to a pension pot over time. The funds are invested in stocks and bonds, with the goal of growing a large lump sum the employee can access in retirement.
- Defined benefit – contributions are still made to these schemes by employer and employee, butthese pensions guarantee retired employees an income for life, regardless of how the pension fund performs. The income is calculated based on how long they worked for their employer and either their final salary, or the average salary they earned while working for the employer. This type of pension is now uncommon because of the costs involved to the employer in underwriting the guarantee.
If desired, you can opt out of a workplace pension, and take the money that would otherwise be invested in your pension pot as pay.
However, by doing so you’ll no longer receive tax relief on this portion of your salary.
State Pension
In the UK, most adults can claim a regular payment from the government when they reach State Pension age (more on this below).
The amount you receive depends how much National Insurance you have paid throughout your career. You can estimate how much you’ll receive, and when, using this government tool.
Self-invested personal pension (SIPP)
A self-invested personal pension (SIPP) is a type of private pension that allows you to build your own portfolio from scratch, with investments of your choosing. But bear in mind you’ll likely pay a fee whenever you buy or sell an investment.
Mr McQueen from Aviva, says: “For most employees, their workplace pension will meet their needs.”
“If, as an employee, you choose to walk past this workplace pension, you will have to do all the leg-work yourself, and you will probably miss out on the additional employer contribution too.”
However, it’s possible to hold both types of pension at once. A SIPP could also be a good option if you’re self employed, and don’t have access to a workplace pension.
