There are a number of different pension types in the UK. One way to categorise them is into private pensions, workplace pensions, and the State Pension. The type of pension scheme you have or are eligible for, will depend on your situation.
We hope you find this article helpful, but it’s not personal advice. Pension and tax rules can change, and any benefits will depend on your circumstances. If you’re not sure what’s right for your circumstances, you should seek financial advice.
How does the State Pension work?
- If you’re eligible, you can claim your State Pension once you reach State Pension age (currently 66, rising to 68 by 2046).
- The State Pension is usually paid every 4 weeks in arrears.
- Any personal and workplace pensions can supplement this income.
How do workplace pensions work?
Employers must set up a workplace pension scheme, automatically enrol eligible employees and pay into it on their behalf. Specific scheme rules may vary, but the government’s auto-enrolment rules mean by law, if you’re eligible, your employer must contribute the equivalent of at least 3% of any qualifying earnings to your pension each year. The total minimum contribution is generally 8%, so if your employer is paying in 3%, your minimum contribution would be 5%.
Many employers will pay in more and some may offer contribution matching. This means they’ll match what you pay in, up to a certain limit. You should contact your employer to find out your options.
There are generally two types of workplace pension:
Defined benefit schemes (e.g. final salary and career average schemes)
- Largely funded by employers, you get a guaranteed taxable income in retirement and often the option of a tax-free lump sum.
- The amount you’ll receive in retirement is broadly based on how long you worked for the employer, your salary whilst working and the scheme’s accrual rate.
- You can normally start taking benefits from the scheme’s normal retirement age, often 60 or 65. You may be able to take benefits earlier, but are likely to receive a reduced level of pension.
Defined contribution schemes (or money purchase schemes)
- Normally funded through you and your employer making contributions.
- Defined contribution schemes are often run by pension companies who will invest contributions with the aim that they will grow in value over time.
- The amount of income received in retirement will depend on, amongst other things, how much you’ve paid in, the performance of any investments and the retirement option(s) you choose.
- You can normally access these types of pensions from age 55 (rising to 57 from 2028).
- You are usually able to take up to 25% of your pension as a tax-free lump sum. Further money taken from your pension will be taxable.
If you’re uncertain which type of workplace pension you have, you should check with your employer.
How do private pensions work?
Private pensions work in a very similar way to workplace pensions and can be opened to supplement a pension through your employer. The big difference is they are set up by you. They still benefit from tax relief and will normally allow you to make regular or one-off payments.
There are three main types of private pension:
Stakeholder Pensions are a straight-forward type of personal pension with low minimum contributions, capped charges and typically limited investment options.
They have a default investment strategy, useful if you don’t want to be making the investment decisions, but it’s a ‘one-size-fits-all’ approach to investing.
Personal Pensions are usually offered by insurance companies. These schemes generally offer a larger range of investments than a stakeholder pension, but aren’t subject to the same rules around minimum contributions and capped charges.
Self-Invested Personal Pensions (SIPPs)
SIPPs are a modern type of personal pension that allow you to choose from a wide range of investments.
With a SIPP, you’ll have the freedom to invest where you want and actively manage your portfolio. This flexible approach is great for someone who wants to take control of their pensions.
All investments can fall as well as rise in value, so you could get back less than you invest.
Cashback  Transfer a pension
We offer the HL SIPP for people who want more control over their retirement savings. It's low cost with a wide range of investment choice. You can even use it to consolidate your old pensions into one easy-to-manage online account.
Transfer by 30 June and receive cashback as a thank you. Terms apply
If you’re thinking about transferring, check you won't lose valuable guarantees, benefits or have to pay excessive exit fees.
Pensions with protected benefits
If you held a pension from before 5 April 2006, there is the possibility that you may have a protected benefit, such as the tax-free lump sum being more than 25% of the pension pot.
Your pension may also have a guaranteed annuity rate. This is likely to be significantly higher than the annuity rates available on the open market today, but may also come with restrictions around when you can take the benefits and what options you can choose.
Transferring to another pension will normally result in these benefits being lost. Depending on its value, your pension provider may require you to get advice from a regulated financial adviser. To transfer to the HL SIPP, this advice must be in favour of the transfer.
Other types of pensions
Pensions in drawdown
You may have accessed your pension through drawdown. This is often done with personal pensions or SIPPs. There are two types of drawdown arrangements: Capped and Flexi-Access.
Capped arrangements (closed to new applicants) have a maximum income level that is normally reviewed every 3 years before the age of 75, and then annually thereafter. As long as any income drawn doesn’t exceed the maximum allowed (and you haven’t flexibly accessed a pension elsewhere), you won’t trigger the Money Purchase Annual Allowance (MPAA) and so any contributions to money purchase pensions wouldn’t be restricted by that allowance.
Income from flexi-access drawdown isn’t restricted. However, once you take a taxable income, any further pension contributions to money purchase pensions, such as the HL SIPP, are normally limited to the MPAA of £4,000.
Retirement Annuity Contracts (RACs)
These old types of pensions (closed to new applicants since 1988) are similar to personal pensions and often have a Guaranteed Annuity Rate (see ‘Protected Benefits’ above).
Additional Voluntary Contribution (AVC) and Free Standing Additional
Voluntary Contribution (FSAVC) schemes
These might be available to members of workplace pension schemes and are designed as an addition to allow people to build up bigger pensions or retire earlier than planned. AVCs are defined contribution schemes so normally there are no pre-determined retirement benefits. With most schemes the benefits are the same as any defined contribution scheme. You can normally take up to 25% tax free, the rest is taxed as income. However, some AVCs that are linked to defined benefit schemes can be used to pay the tax-free cash in relation to the defined benefit scheme
Tax-free cash for defined benefit schemes is normally generated by reducing the pension income available. The advantage of using the AVC to provide this is that the promised income won’t usually be affected. In some instances, the entire AVC pot can be drawn as a tax-free lump sum. If transferring linked AVCs greater than £30,000, you will be required to get advice from a regulated financial adviser, as this benefit will be lost on transfer. Some providers may require you to get advice for transfers of smaller sums.
Executive Pensions (EPPs)
These are defined contribution schemes generally set up by smaller companies for their directors and senior employees. As they are defined contribution schemes there are normally no guarantees over the pension pot.
Old protected rights pensions
These will often be in the form of a personal pension and generally there are no guarantees with the pot. Other pension providers may offer a wider choice of investments and retirement options, but individuals must be comfortable making those decisions themselves.
Protected Rights and the ability to contract out of the State Pension no longer exist.
Guidance, help and advice
- Guidance from Pension Wise - Pension Wise is a free, impartial government service for anyone aged 50 or over, with a UK based personal or workplace pension. It can help you understand what type of pension you have, how you can access your savings and the potential tax implications of each option. But it isn’t financial advice. More about Pension Wise.
- Support from HL's UK-based helpdesk - Our UK-based helpdesk are here for you six days a week. Our friendly and knowledgeable team are ready to answer your questions no matter how big or small. Call us on 0117 980 9926. Opening hours Monday - Friday: 8am - 5pm, Saturday: 9.30am - 12.30pm.
- Retirement Advice from HL - Our financial advisers can work with you to: plan your personal budget and retirement income strategy, make sure your investments match your goals and give pension advice, including when and how to take them. Discover retirement advice.