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What are the different types of pensions in the UK?

What types of pensions are there in the UK?
Empty hampers | Wealthify
Reading time: 7 mins

If you’re looking to save for retirement, it’s important to understand how the different types of pensions available in the UK work. Here’s a short guide to help you get familiar with how the state pension, workplace pension schemes, and personal pensions work.


First, there’s the state pension

What is the state pension?
The state pension is a regular payment you should receive from the government when you reach retirement age. And the income you receive depends on you having paid a certain level of national insurance contributions over your working life. To get any state pension, you’ll need at least 10 years’ worth of contributions – if you don’t meet this requirement, you may not receive any money from the government. The maximum you can get is £9,110 a year, but to receive the full amount, you’ll need to pay contributions for at least 35 years1. If you have any gaps and worry about not having enough years of contributions to get the full state pension, it could be helpful to contact HMRC and check how many years you’ve got to catch up and whether you’re eligible to pay voluntary contributions.

The way you pay national insurance contributions will vary depending on your working status. If you’re employed in the UK and earn over £166 a week, then the process should be automatic, and your company should be paying national insurance contributions out of your salary – these will vary depending on how much you earn. However, if you’re self-employed, you won’t have anyone to make contributions on your behalf, and you’ll need to do it all by yourself. A recent study shows that only 44% of UK pensioners have been able to claim the full state pension, so make sure you’re on top of your national insurance contributions2.


When can you move your state pension into drawdown?
If you’re eligible to claim a state pension, you’ll only be able to move your pension money into drawdown (when you start withdrawing your pension money) and take money out once you reach your pension age, – also known as State Retirement Age, this is the earliest age you’ll be allowed to receive your state pension. This age is worked out based on your date of birth and your gender. As a rule of thumb, you can currently claim your pension from the age of 65. However, since we tend to live a little bit longer, the pension age is set to increase in the future. By October 2020, you’ll need to wait an extra year to claim your state pension, and between 2026 and 2028, you’ll need to be 67 to receive any money from the government3.


How can you claim your state pension?
Two months before you reach your pension age, you’ll receive a letter that will tell you what to do to claim your state pension. If you don’t get anything, make sure you get in touch with HMRC.

Here are some useful links to help you make the most of your state pension:

Check your national insurance record: https://www.gov.uk/check-national-insurance-record

Check your pension age: https://www.gov.uk/state-pension-age

Contact HMRC: https://www.gov.uk/contact-pension-service


Next, we’ve got workplace pension schemes

What are workplace pensions?
Workplace pensions are schemes that allow you to save for retirement and they’re generally arranged by your employers. There are two types of workplace pensions:

  • Defined benefit schemes: these will give you a guaranteed income for life from the day you retire, and the amount you’ll get may increase every year.
  • Defined contribution schemes: the money you put in these is invested by a pension provider, chosen by your employer, and the amount you’ll receive will depend on how much you’ve paid in, how long you’ve been paying in, and how well the investment has performed.

Typically, you’ll be automatically enrolled in your workplace pension – this is a government initiative to encourage Brits to think about their later life whilst they’re still young.


How much can you put in your workplace pensions?
As things currently stand, you need to contribute at least 5% of your salary and your employer pays a minimum of 3% of your pay to boost your pot. You don’t need to arrange any payment as everything is automated and a portion of your salary will go to your pension pot every month before tax.


What should you do if you lose track of your workplace pensions?
Throughout your career, you may move jobs several times and get enrolled in different workplace pensions. With time, it’s easy to lose track of all the pots you’ve contributed in. In fact, a recent study has found that there are about 1.6 million unclaimed pension pots in the UK – and together, they’re worth more than £19 billion4! So, if you don’t know where your pensions are, it could be a good idea to locate them – you can easily find your lost pensions via the HMRC website: https://www.gov.uk/find-pension-contact-details.

Once you know where your pensions are, it could be worth bringing them all into one simple scheme – that way you’ll have everything in one place, and it’ll make it easier for you to manage your retirement savings. But before consolidating your pensions, make sure you shop around and compare what providers are offering. It’s also important to look at their fees, as they’ll be eating into your potential returns. But don’t just focus on costs and charges, and consider the overall service, including things like customer service, user experience, and investment strategy.


When can you move your workplace pensions into drawdown?
To move your pensions into drawdown and start taking money out, you’ll need to check the rules of your pension schemes as they’re the ones deciding when you’ll be able to withdraw your funds. However, most pensions will let you take out your money as soon as you turn 55 – you just need to make sure you know the drawdown rules of every pension scheme you’ve enrolled in. If you’ve consolidated your pensions, then you won’t need to spend time checking the policies of different pension providers, your pot will only be subject to a single set of rules.


And to finish, we have personal pensions

What are personal pensions?
A personal pension is a type of pension that gives you more control and flexibility over your retirement savings. Not only do you have some say on how and where your money is invested, but you can make your own contributions. Often, you’ll see people talk about Self-Invested Personal Pensions, or SIPPs. There isn’t much difference between the two. In fact, SIPPs are a type of personal pension where your investments can grow free from income and capital gains tax. At Wealthify, we prefer to use the term ‘personal pension’ because it sounds less jargon-y, but our Personal Pensions work in the same way SIPPs do.


How does pension tax relief work?
Every time you pay into a personal pension, or SIPP, you’ll receive 20% tax relief from the government – this is to compensate for the income tax you’ve already paid. If you’re a basic rate taxpayer, you typically need to pay 20% tax on your income. So, if you earn £1,000, the government will take £200 and you’ll be left with £800. Now, this is where the magic happens. If you decide to put your £800 in a personal pension, the government will reward your long-term investment by adding £200 to your pot. Since £200 is 25% of £800, you’ll effectively be getting a 25% uplift on each contribution you make.


How much can you put in a personal pension?
You can put as much as you want in your personal pension, however, the amount you get tax relief on is limited to £40,000 a year (or 100% of your earnings, whichever is lower) – this is your annual allowance, and it includes the combined contributions made by you and the government. If you don’t have any UK earnings, you can still pay into a personal pension, but the annual allowance will be set at £3,600 a year – and this also includes contributions made by you and the government. If you’re unable to use your full pension allowance, you may be able to carry it from the three previous tax years, as long as your earnings are equal to the total amount of your contributions and you’re a member of a registered pension scheme.


When can you start taking money out of your personal pension?
With a personal pension, you won’t be able to access your money until you turn 55, but you’ll still have the possibility to pay into your pot until your 75th birthday. Once you’re 55, you’ll be allowed to take up to 25% of your money as a tax-free lump sum. The way you withdraw your funds will depend on the type of pension you’ve got. Just like workplace pensions, if you have a defined benefit pension, you’ll get an income that will gradually increase throughout the years. If you’re paying into a defined contributions scheme, then you’ll be able to choose your preferred drawdown method. You’ll have the possibility to either take your whole pension in one go as a lump sum, withdraw money when you need it, or get paid a regular income based on your pot size.

Although it’s tempting to withdraw money on your 55th birthday, the longer you wait, the better chances your pension has to grow.


How to open a personal pension
Opening a personal pension is easier than you might think. With online investment platforms, like Wealthify, the hard work is done for you. All you need to do is choose how much you’d like to put in your personal pension – you can get started with just £50. Then simply select the risk level that suits you, whether it’s cautious or adventurous. We’ll build your Plan and manage your investments on an ongoing basis. And that’s not all! With our app, you can check how your pension is performing anywhere, at any time – with Wealthify you’re in control of your retirement.

Want to know how much money you could have when you retire? Our pension calculator can help give you a good idea of what your yearly or monthly income could be. Why not have a play with the figures to see how much of an impact little changes can make? Try it here: wealthify.com/pension-calculator



1: https://www.gov.uk/new-state-pension/what-youll-get

2: https://www.independent.co.uk/money/spend-save/pension-state-dwp-income-retirement-money-women-a9203726.html

3: https://www.which.co.uk/money/pensions-and-retirement/state-pension/state-pension-age-calculator-asfz43c0xp8q

4: https://www.theguardian.com/money/2019/may/12/lost-pension-funds-pots-auto-enrol-track-trace


The tax treatment depends on your individual circumstances and may be subject to change in the future.


Please remember the value of your investments can go down as well as up, and you could get back less than invested.

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