The British pension system is designed to give retirement savers choice over how they put money aside for their retirement. The options often depend on how a saver is employed and who they work for. Although everyone can qualify for a state pension, retirement saving is offered in several ways and some savers have several different types of pension.
What are the main personal pensions?
Besides the state pension, savers can have a personal or workplace scheme. Personal pensions come as retirement plans that collect contributions and generally have managed funds. Other personal pensions give the saver more control – such as a self-invested personal pension (SIPP) or a Small Self-Administered Scheme (SSAS). With these, retirement savers can invest in a more diverse selection of shares and funds.
Pensions for employees
Workplace or employer pensions come in three types:
- Public sector pensions for teachers, nurses, the Armed Forces, police and firemen many others employed by councils and government agencies
- Civil Service pensions for workers in government departments and diplomats
- Workplace schemes for employees of private companies and businesses
Workplace schemes can be defined benefit or defined contribution pensions
Defined benefit pensions
Today, not many workplace schemes follow the defined benefit model, primarily due to the cost of running such a scheme, which pays a guaranteed retirement income based on final salary and length of service. However, in the public sector and civil service, pensions may still be a defined benefit scheme. Defined benefit pensions can come with extra benefits, like index-linked retirement income and guaranteed annuity rates.
Defined contribution pensions
These are pensions with retirement income decided by the underlying value of funds, bonds, stocks and shares. The pension payment is not guaranteed and is not related to salary or length of service.
Pension tax relief
To encourage saving, the government offers a tax top-up on money paid into a pension. For every £80 paid in by a basic rate taxpayer (20%), HM Revenue and Customs (HMRC) adds £20. Higher rate taxpayers (40%/45%) also get the top-up according to the rate of tax they pay, subject to annual contribution limits.
Taking pension cash
Unless a retirement saver suffers from serious ill-health, the minimum age for taking cash from a pension is 55 years old, although this is due to increase in 2028 to 57. From that age, savers can draw some or all their retirement fund. This can be as a 25% tax-free lump sum, a regular income or irregular withdrawals. Besides the tax-free amount, this pension cash is liable for income tax.