What is a pension in the UK?

The topic of Pensions in the UK can feel overwhelmingly complex, but it doesn’t need to be. Let’s take a look at the basics of what a pension is, the different types of pension available in the UK, and the vital role they will play in your future wellbeing and enjoyment of later life.

Introduction to pensions in the UK

What is a pension?

A pension in the UK is a savings pot designed to support you financially after you retire or semi-retire. The idea is to build this savings pot by making pension contributions, usually from your monthly income, and investing those savings in a pension scheme that will potentially grow over time until you access it for retirement, at age 55 or older.

For example, your employer (if you have one) will typically have a workplace pension scheme for you to join. This could be a pension fund they have set up for their employees, or part of the UK government backed workplace pension scheme.

Whether you have a workplace pension or not, there is also the option for you to have a private pension in the UK, also known as a personal pension, as well as the basic UK State Pension.

We’ll take a quick look at all of these, but if you’d like more detail we have blogs fully explaining each individual type of UK pension, linked further below.

Types of UK pensions

As mentioned above, there are three main types of pension schemes in the UK:

• State Pension
• Workplace Pensions
• Personal Pensions (or Private Pensions)

Each type of pension works slightly differently, here’s how.

Comparing pension types in the UK

What is the UK state pension?

The State Pension is a regular payment you can claim once you reach the State Pension age (this changes over time so be sure to check the current State Pension age). The amount you receive depends on the National Insurance Contributions you have made over the course of your working life. While the State Pension is a good source of income to have, there are arguments to be made that it is not enough to live comfortably in later life.

It is also worth bearing in mind that there is always the potential that the Government backed pension may be removed through political decision making in the future. So it is not guaranteed to be there by the time you retire. This makes your option to have a workplace pension and/or personal pension even more important to consider.

What is a workplace pension in the UK?

A workplace pension is organised through your employer. This can be through their own scheme, a specialist pension provider, or a government-backed scheme. There are countless schemes for employers so for now we will focus on the government backed scheme. Due to Auto Enrolment legislation, employers must set up a pension scheme for eligible staff, unless you as the employee ask to opt-out of having a workplace pension.

• Employer Contributions: Employers must make a minimum contribution to your workplace pension. Some employers offer to make larger contributions in order to attract employees, but the minimum employer contribution to your workplace pension is equal to 3% of your gross (before-tax) wages or salary. Employer contributions are paid directly by your employer, so they will not be taken from your personal income.
• Employee Contributions: As an employee, you also need to make a minimum contribution to your workplace pension from your wages or salary. The minimum total contribution for a workplace pension is 8% of your gross pay. So if your employer is making their 3% minimum payment, you will need to make up the other 5%. Because you make your workplace pension contributions through the PAYE system, the Government will automatically apply tax relief to your contributions. (Some scenarios vary).

What is a personal pension in the UK?

With a personal pension or private pension, as the name suggests, there is no employer in play. This can be in addition to your workplace pension, or you might be a self-employed. With personal pensions, the amount you receive at retirement depends entirely on how much you’ve paid in and how well your investments have performed. This makes it really important to get trustworthy advice about your personal pension. A chartered financial firm like Lomond Wealth will provide impartial, expert advice you can trust.

• Contributions: You choose how much to pay into your personal pension and how often. For most people this is fixed affordable monthly amount, but we offer personalised plans to everyone we advise.
• Tax Relief: The pension provider you choose will claim tax relief from the UK government on your behalf. They will then add it automatically to your pension pot.

Another Thing to Consider About UK Pensions

Defined Benefit vs. Defined Contribution Pensions

It is important to note that, within both workplace pension schemes and personal pensions, there are two types of pension. These are known as Defined Benefit Pensions and Defined Contribution Pensions.

Regardless of which you have, the general concept is the same as everything else we have described above. You (and for workplace pensions, also your employer) will make pension contributions into your pension pot over the course of your working life, to prepare for retirement.

Your pension provider will then invest that pot of money. You will also be able to receive tax relief from the Government on the pension contributions you make. However, there are several ways these two types of pension vary, including how they pay out when you retire.

For a full and clear explanation about how these types of pension work, check out our blogs linked below. Before you make any investment decisions regarding your pension, you should also seek advice from a Chartered Financial Advisor like Lomond Wealth. So please, get in touch and we will be happy to help.

Learn more

What is the minimum pension I need to retire in the UK?

What size pension do I need for a moderate retirement in the UK?

How much money do I need to retire comfortably in the UK?

How do defined benefit pensions work?

How do defined contribution pensions work?

 

check out Defined Benefit vs. Defined Contribution Pensions Made Simple.

What Others Ask Us About UK Pensions

How do I claim tax relief on my pension contributions in the UK?
How much money do I need to retire in the UK?
What are Defined Benefit vs. Defined Contribution pensions?