In a nutshell, there are three types of pension:
- The State pension – what the government contributes to your retirement income.
- Workplace pension – if you are employed, you will be auto-enrolled into a workplace pension which both you and your employer pay into. These can either be defined contribution (DC) or defined benefit (DB).
- Personal/Private pension – a pension that you set up to supplement your retirement income. These can either be stakeholder pensions or SIPPs (self-invested personal pensions).
Let’s look at each type of pension in more detail…
The State pension
Most UK citizens can claim the state pension on retirement if they have at least 10 years of National Insurance contributions. The age that people first can claim the state pension is currently 65 years old, however this is rising. This will be 66 for everyone from October 2020, and by April 2046, everyone will have a state pension age of 68. You can forecast your state pension age using the government’s ‘Check your state pension’ calculator.
The amount of state pension you will receive depends on how many years you’ve paid National Insurance contributions. To claim the full state pension (£175.20 a week – 2020/21 rate) you will need 35 years (from April 2016). If you’ve made fewer than 35 years’ contributions and at least 10 years’ worth, you’ll still get a basic state pension – it will just be adjusted to reflect the number of qualifying years you have.
Workplace pensions generally fall into two categories:
- Defined contribution (also known as DC or money purchase schemes). This is the most common type of workplace pension today. Here, the final amount will depend on how much you have contributed, how this money was invested, and how the investments performed overall during the time the money was invested.
- Defined benefit (also known as DB or final salary schemes). This type of pension guarantees an income based on the salary you earned in that workplace and how long you were employed. Depending on the scheme and your circumstances, these pensions can be really helpful for your retirement. They are most common in the public sector or in some big corporations, but most companies today simply can’t afford to pay for a guaranteed pension income.
If you’re not sure which type of pension you have, try the government’s Pensions Type Tool.
What is auto-enrolment?
Auto-enrolment was started by the government in 2012 to get more people saving for retirement and reduce the burden of an ageing population. If you are in a job, over the age of 22, earn over £10,000 and work in the UK, you automatically contribute a percentage of your salary into your workplace pension. You’ll keep doing that every month while you remain with that employer – unless you opt out.
Most people stay opted in and there’s a smart reason: the employer contribution. In any workplace scheme, government rules mean your employer has to pay into your pension alongside you. As of April 2019, at a minimum, you are required to pay in 5% of your earnings and your employer is required to pay in 3% of your earnings. It could be more, depending on how good your scheme is and how generous your firm . In the best schemes, the employer will offer to pay up to a certain level (above the minimum) if you match it. So, if this is an option for you – go for it. Opting out means you would give up that free money completely.
Whilst auto-enrolment has been a huge step forward, unfortunately the total minimum contribution is unlikely to be enough to fund a retirement you can actually look forward to.
To achieve that, you’ll either need to increase what you contribute or you’ll have to set up another pension. Your workplace pension may also not offer the range of investment choices you’d like. After all, the provider is picked by your employer – not you. All of the above means you should be considering other pension options on top of a workplace pension. Such as private pensions…
What if I’m self-employed?
If you’re self-employed, you currently don’t have access to any kind of workplace pension, although the government is looking into extending auto-enrolment in some way to address this.
This is a private pension that you can open directly through fund providers or through companies like us, Moneybox. Unlike a workplace pension, you could have more control of where your pension is held, as well as what funds it is invested into. There can be many different funds to choose from, although a provider can restrict the number of funds they offer you.
You are usually asked to identify how much risk you want to take and whether you have particular preferences – like socially responsible companies – before you choose a tailored fund. You then contribute a set amount into the pension (weekly, monthly- you decide) and the fund grows depending on how it’s managed. You may also be able to switch between funds, should you wish to although there may be a charge associated with this.
Please note Moneybox cannot accept a pension you’re currently paying into, or any old pensions that provide guaranteed benefits when you retire.