Types of workplace and other pension schemes
Last updated 6 April 2016
A workplace pension scheme is usually the best way to save for retirement, because your employer adds to your savings. But you can arrange your own personal pension.
Under rules called automatic-enrolment, between 2012 and 2018 all employers have to enrol most of their employees into a pension scheme through work. You can choose to opt out, but that’s like turning down extra salary, because your employer must pay into the scheme for you.
If you want to top up your workplace scheme or you are self-employed, you can arrange your own personal pension.
Main types of scheme
There are two main types of pension scheme:
- Defined benefit scheme. This promises you a set level of pension, usually worked out as a percentage of your salary. For example, you might get one-fiftieth of your average salary while in the scheme for each year you have been a member. So, if your average earnings are £30,000 and you have been in the scheme 10 years, your pension would be 1/50 x £30,000 x 10 = £6,000 a year. This type of scheme is only offered in some workplaces and includes final salary and career averaging schemes.
- Defined contribution scheme. You build up your own pot of savings. How much your pot is worth by retirement depends on the amount paid in, how well the invested savings perform and the charges deducted. The maximum that a scheme used for automatic enrolment can charge is 0.75% a year of the value of your pension pot. How much pension the pot can provide depends on the choices you make and investment conditions at that time.
Pension schemes through your work
Different employers offer different sorts of scheme, so you might belong to:
- A company scheme (also called an occupational pension scheme or superannuation scheme). This is run by your employer. When you leave the employer, all the contributions stop, but you keep the pension you have built up so far. This could be a either a defined benefit scheme or a defined contribution scheme
- A multi-employer scheme. This is similar to a company scheme but run by a separate organisation and covers employees from many different employers. These are usually defined contribution schemes. An example is the National Employment Savings Trust (NEST) which was set up by the government especially for automatic enrolment. With NEST, you have your own personal account and, although your employer’s contributions stop when you change job, you can still carry on saving with NEST.
- A group personal pension scheme (GPPS). This is run by an insurance company or other provider. Although it is arranged for a group of employees, you each have your own personal pension. When you leave your job, your employer's contributions stop, but the scheme stays with you and you can carry on paying into it. All GPPS are defined contribution schemes.
- A stakeholder pension scheme. This is just a particular type of personal pension that must meet certain conditions, such as a minimum contribution level of £20 or less a month. When you leave your job, the scheme stays with you and you can carry on paying into it. A stakeholder pension scheme is always a defined contribution scheme.
Pensions you arrange for yourself
You can take out your own personal pension with an insurance company or other pension provider. Personal pensions are always defined contribution schemes.
You choose how you want to invest your money. If you have your pension with an insurance company, typically you choose from a range of investment funds. These spread your money across many different shares, bonds and/or other assets.
Other providers offer self-invested personal pensions (SIPPs) which give you a much wider choice of investments, including for example direct holdings of shares and commercial property.
The NEST pension scheme described above is not just for employees – you can also join it if you are self-employed.