1.2 The Main Types of UK Pension Schemes

Understanding the different types of pensions is key to making informed choices about your retirement savings.

Three Broad Pension Categories

UK pensions fall into three main categories:

1. State Pension – paid by the government
2. Workplace Pensions – arranged by your employer
3. Personal Pensions – set up by you directly

Each has its own rules, benefits, and limitations. This chapter explains how they work and how they might fit into your retirement plan.

1. State Pension

Key facts:

• Paid by the UK government from State Pension age
• Based on National Insurance (NI) contributions
• Available to most people who have paid or been credited with enough NI over their working life

2024/25 New State Pension:

• Up to £221.20 per week (£11,502.40 per year)
• You need 35 qualifying years for the full amount
• Minimum of 10 years needed to receive anything

Important:

• The State Pension is not means-tested
• It is subject to income tax
• You can defer it for a higher weekly amount

2. Workplace Pensions

These are pensions you build through your employer, and they come in two main types:

A. 

Defined Contribution (DC) Schemes

Also known as money purchase pensions, these are the most common modern workplace pensions.

• Contributions: From both employee and employer
• Invested: Into funds chosen by you or the scheme
• Outcome: Pot value depends on contributions + investment returns – charges
• Access: Usually from age 55 (rising to 57 in 2028)

Auto-enrolment means most employees are automatically enrolled into a DC scheme, unless they opt out.

Minimum contributions (as of 2024):

• Employer: 3%
• Employee: 5%
• Total: 8% of qualifying earnings

B. 

Defined Benefit (DB) Schemes

Also called final salary or career average schemes, these are becoming rarer in the private sector but still common in public service.

• Promise: Pays a guaranteed income based on your salary and years of service
• Employer risk: The employer bears the investment and longevity risk
• Inflation protection: Often included
• No investment decisions needed from you

Example formula:

Final salary × Years of service × Accrual rate (e.g. 1/60th)

So, a salary of £45,000 after 30 years at 1/60th = £22,500 annual pension

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3. Personal Pensions

Set up and managed by the individual rather than through an employer. Suitable for:

• Self-employed people
• Those wanting more control
• Those with gaps in employment
• Anyone wanting to supplement workplace savings

A. Standard Personal Pensions

• Offered by insurance and pension providers
• Contributions receive tax relief
• Funds are invested in portfolios selected by the provider or the individual

B. SIPPs (Self-Invested Personal Pensions)

Like a personal pension, but with more control and choice

• Can invest in: shares, funds, ETFs, commercial property, etc.
• Suitable for confident investors or those working with advisers

Be aware:

SIPPs require active management, and charges can be higher than standard pensions — particularly for small pots.

C. Hybrid or Legacy Schemes

Some pensions don’t fit neatly into the categories above:

• Career average revalued earnings (CARE) – a type of DB scheme
• Section 32 buyout plans – older policies, often from pension transfers
• Executive pensions – historically used for directors

It’s worth reviewing older schemes with a pensions adviser to understand their value and features.

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Summary Table

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Next Chapter Preview:

We explore whether pensions are still the best way to save for retirement — comparing them with ISAs, property, and other options.

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