What types of Pensions are available?

For those who work outside the world of finance, Pensions can have a confusing reputation. However, taking the time to gain an understanding of Pensions before you retire means you can plan how you’ll fund your later life.

A Pension is a retirement plan in which money is invested towards supporting yourself when you stop working. Typically, you’ll invest part of your income each month and over a career this can grow into a nest egg for you to live on. No matter the type of Pension, you can only withdraw from it once you reach ‘pensionable age’, which is usually 55 (rising to 57 in 2028).

Different types of Pension plans are used for a range of reasons. Here, we look at the main ones and how they work.

The State Pension and New State Pension

The State Pension* is provided by the government if you have made enough National Insurance contributions over a long enough period. This can get confusing as there is a Basic State Pension and the New State Pension.

As stated on gov.uk*, you can claim the Basic State Pension if you’re a man born before 6 April 1951 or a woman born before 6 April 1953. If you were born on or after these dates, you’ll need to claim the New State Pension instead.

On its own, the State Pension does not always provide enough for your retirement, so a private Pension may help you to take an active step in adding to your overall Pension income and potentially make retirement more comfortable for you.

True Potential’s Savings Gap research*** highlights that most people think they will need £23,000 a year in retirement to live comfortably. The full New State Pension* is £221.20 per week, which is just over £11,500 each year, but you usually need 35 qualifying years of National Insurance contributions to get the full amount. This means you could receive a lower amount.

National Insurance qualifying years

To receive your State Pension, you’ll need to have qualifying years. These are the years that you have successfully contributed to your National Insurance. According to gov.uk*, a National Insurance qualifying year includes one or more of the following:

  • You worked and paid National Insurance.
  • You got National Insurance Credits. For instance, you were registered as unemployed, sick, or a parent or carer.
  • You paid voluntary National Insurance contributions.

There is a set number of qualifying years you need to receive any Basic State Pension. It differs between men and women:

  • For men: You usually need one qualifying year if you were born between 1945 and 1951 or 11 qualifying years if you were born before 1945.
  • For women: You usually need one qualifying year if you were born between 1950 and 1953 or 10 qualifying years if were born before 1950.

You can check how much State Pension you are due by reviewing your State Pension forecast here*.

How many other types of Pension are there?

As well as the State Pension, there are two main types of Pension plan that you can choose from: Defined Contribution and Defined Benefit. Different Pensions tend to fall into these two Pension types.

Defined Contribution

This type of Pension plan is sometimes referred to as a Personal Pension plan. It’s one that you can open on your own, but it’s also a Pension type that your employer might offer (a workplace Pension plan), and it’s usually operated by a separate Pension company.

Whether you open the Pension plan or your employer does, it’s paid into to create a pot of money. The pot is then invested to build on the amount of money. However, some factors affect these investments, including how much is paid in and where the money is invested.

The payout from a Defined Contribution Pension plan is based on how much money has been paid into the pot throughout your life, investment growth over time, any charges paid, and how you choose to take your money at retirement.

Also, with a Defined Contribution Pension, your personal contributions receive tax relief from the government, if eligible. This makes a Pension one of the most tax-efficient ways to save for life after retirement.

With investing, your capital is at risk. Investments can fluctuate in value, and you may get back less than you invest. This blog is for information only and is not personal financial advice.

Here’s a look at Workplace Pensions and Personal Pensions in more detail:

Workplace Pensions

Workplace Pension* is arranged by your employer and is a way of saving for your retirement. For most people, it’s a legal requirement that you should be auto-enrolled into this type of Pension.

Your employer will pay a contribution alongside your contribution, and you’ll also benefit from tax relief*. This can be an effective way to build a nest egg, as you can pick where to invest your Workplace Pension as all offer a range of funds, in addition to the default fund.

Personal Pensions

Personal Pension** is similar to a Workplace Pension, but you set this up yourself. The money you contribute benefits from tax relief* and is put into your chosen investments that aim to grow your money.

The main benefit compared to the Workplace Pension is you can pick where to invest your money with the aim to maximise growth. For example, in our True Potential Pension** you can invest in a range of globally diversified portfolios.

With investing, your capital is at risk. Investments can fluctuate in value, and you may get back less than you invest. This blog is for information only and is not personal financial advice.

Defined Benefit

This is often referred to as a Final Salary Pension** and it’s a different type of Workplace Pension to the one you will have if you opt for a Defined Contribution.

These Pensions* tend to be from public sector or older workplace Pension schemes and are now less common. If you have one of these Pensions, speaking to a specialist financial adviser is important if you’re thinking about accessing or transferring your pot.

This type of Pension plan pays out a set income for life when the time comes to take your Pension money. The amount you receive will depend on factors such as how long you’ve been employed at the company and how much you’ve earned while you’ve worked there.

To access this Pension type, your employer enrols you in the Defined Benefit scheme and your employer is the one who pays into this.

While it’s your employer’s responsibility to ensure that there’s enough in your Pension pot when you retire, it’s often a scheme requirement that you’ll have to contribute, too.

Choosing the right types of Pension for you

As we’ve seen, there are different types of Pension available and you need to assess what is best for your circumstances. Start with your goal, think about your lifestyle and how much money you’ll need in retirement. Then think about how much time you have before retirement. You can then make an informed decision about which investment strategy is best for achieving your goals.

If you’re already an investor with True Potential, and require support with a personal Pension, speak to your financial adviser or call our Relationship Management team on 0191 500 9164. They’re available 7am – 8pm weekdays and 8am – 12pm on Saturdays.

If you do not currently invest with True Potential and would like to find out how we can help you do more with your Pension, contact us today – we are happy to speak through the available options and help you do more with your money. Please call one of our experts on 0191 625 0350 to get started.

Tax is subject to an individual’s personal circumstances, and tax rules can change at any time.

With investing, your capital is at risk. Investments can fluctuate in value, and you may get back less than you invest. This blog is for information only and is not personal financial advice.

*Data sourced from Gov.uk: https://www.gov.uk/ and accessed 15/04/24

**Data sourced from True Potential: www.truepotential.co.uk and accessed 15/04/24

***Data sourced from True Potential: /tackling-the-savings-gap/ and accessed 15/04/24

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