🎓 Pensions Academy Lesson 2

Hearing pension buzz-words like ‘auto-enrolment’ or ‘defined contribution’ can get confusing. But when you break down the jargon, the different types of pensions aren’t as daunting as they may seem.

Understanding the different pension types available, as well as their benefits, could help you make the most of your retirement savings. 🚀

In a nutshell, there are three main types of pensions:

  • 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 people can claim the State Pension on retirement if they have at least 10 years of National Insurance contributions. The State Pension age is always under review by the government. Currently, the age that people can first claim the State Pension is currently 66, rising to 68 by April 2046. 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 (£179.60 a week, £9,339 a year – 2021/22 rate) you will need 35 years’ worth of National Insurance contributions. If you’ve made contributions for fewer years but for at least 10 years, you’ll still get a basic state pension but it will be adjusted to reflect the number of qualifying years you have.

Workplace pensions 💼

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. If you are employed by a company, 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 – which is essentially free money! 💰 In any workplace pension scheme, government rules mean your employer has to pay into your pension alongside you. To meet the government’s 8% minimum annual contribution into a workplace pension, you’re normally required to pay in 5% (minimum) of your annual earnings. By doing this, you’ll get a nice 3% top up from your employer. Alternatively, your employer could cover the whole 8% or choose to pay in even more. If a workplace pension is available to you, it’s important to maximise your contributions here, where you get the free employer contributions, before looking to open another pension.

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. We take a look at the retirement living standards and how you could close this gap in Lesson 3.

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 could consider other pension options on top of a workplace pension, like a personal pension.

 

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. One of the best options for you will be to open a personal pension…

Personal/Private pensions 🧑

A personal or private pension is one that you can open directly through fund providers or through companies like us, Moneybox. Unlike a workplace pension, you could have more control over your pension investments.


You are usually asked to identify how much risk you want to take and whether you have any particular preferences – for example investing in socially responsible companies – before you choose a tailored fund. You then contribute a set amount into the pension (e.g. weekly, monthly) and the fund grows depending on how it’s managed. Learn more about the Moneybox Pension in Lesson 10!

 

🎓  In the next lesson, we look at how a personal pension could help build up a healthy retirement pot

 

 

As with all investing, the value of your pension can go up and down, and you may get back less than you invest. Payments you make into your pension won’t be accessible until the minimum pension age (currently 55, increasing to 57 in 2028). We do not currently offer drawdown products (for the Moneybox Pension). If you’re not sure whether the Moneybox Pension is right for you, a suitably qualified financial adviser can help you decide. Moneybox Personal Pension T&Cs Apply.