Learn about what a pension is, the different types of pensions, and how you can use them to save for your retirement.
Pensions explained
A pension is an account that can help you build a source of income to enjoy in your later years. Pensions offer generous tax reliefs as an incentive to save for retirement. There are many types of pensions, and you’ll typically end up with more than one over your working life, each helping you save in different ways.
How do pensions work?
Different pensions work in different ways. Generally, you can pay money into your pensions and receive tax relief up to the value of your earnings (capped at £60,000 per tax year).
For example, for every £8,000 you contribute to your SIPP, the government pays in £2,000. Plus, if you are a higher-rate taxpayer, you can claim further tax relief through your tax return.
What are the different types of pensions?
Below are some of the different pensions you can use to achieve your retirement goals.
State pension
The government provides a state pension based on your National Insurance contributions. It is paid to you once you reach State Pension age. You can get a forecast of your state pension online or by calling 0345 3000 168.
Personal pension
Examples include a Self-invested personal pension (SIPP) or Ready-made pension. It gives you more freedom over how you invest the money than you might have in a company scheme. Your employer does not necessarily contribute to a personal pension (although it can do so).
Occupational pension
An occupational pension is a scheme established by an employer for its employees. There are many different types, which we cover below.
| Final salary (defined benefit) scheme | Career average pension | Money purchase (defined contribution) scheme | Stakeholder pension | Automatic enrolment scheme |
|---|---|---|---|---|
| The amount you receive at retirement is determined by the final salary you received from your employer and the length of service. | This is similar to a final salary scheme, but the amount received is based on an average of your salary across your career with the company. | The income at retirement depends on the amount of money generated by contributions, tax relief and investment returns. | These were introduced in 2001 and are designed to be low-cost money purchase schemes. | This is a money purchase scheme set up to encourage employees to save in a pension. Both you and your employer make contributions. |
To maximise your retirement savings, you might want to contribute to more than one pension. Many people have several as they've worked for different companies during their working life. As such, it’s important to keep track of your pensions, understand what you have, how it’s invested and whether it’s performing well.
What are the benefits of a personal pension?
- You're in charge Decide from a range of investments for your pension
- Control: Look after your pension online with less paperwork, and transfer in other pensions to consolidate your pot
- Flexibility: A pension can help you save for retirement if you're self-employed
Self-invested personal pensions carry some unique benefits also. Your employer can contribute to a SIPP, and from age 55 (57 from 06 April 2028), you can access all or some of your SIPP in a way that suits you.
What type of pension is right for me?
Self-invested personal pensions are not suitable for everyone. They're suitable for investors who are comfortable making their own investment decisions and are willing to regularly review their portfolio to ensure the investments remain in line with their pension objectives.
If you don’t think you will make use of a SIPP’s investment choices, or are uncertain about building and managing your own pension portfolio, then our Ready-made pension may be better suited for you.
You may also want to consider consolidating your pensions if you've changed jobs over the years, as you may have lost track of old pension schemes. You can find and combine your pensions in one pod, with our free pension finding service.
Important information: These articles are for information purposes only and are not a personal recommendation or advice. Remember, you cannot usually access a pension until age 55 (57 from 2028). Tax treatment depends on your individual circumstances and rules may change. Pension rules apply.
An AJ Bell SIPP gives you complete flexibility on how much you save for retirement, and when and where your pot is invested.
The AJ Bell Ready-made pension is a low-cost, hassle-free solution, designed to simplify how you build, manage and grow your pension pot.
Written by:
Charlene Young
Pensions and Savings Expert
Charlene Young is AJ Bell’s Pensions and Savings Expert. She joined AJ Bell in 2014 from a wealth management firm where she worked with private clients and small businesses as a financial planner.
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