Types of private pensions

Private pension schemes are ways for you or your employer to save money for later in your life.

There are 2 main types:

  • defined contribution - a pension pot based on how much is paid in
  • defined benefit - usually a workplace pension based on your salary and how long you’ve worked for your employer

Defined contribution pension schemes

These are usually either personal or stakeholder pensions. They’re sometimes called ‘money purchase’ pension schemes.

They can be:

Money paid in by you or your employer is put into investments (such as shares) by the pension provider. The value of your pension pot can go up or down depending on how the investments perform.

Some schemes move your money into lower-risk investments as you get close to retirement age. You may be able to ask for this if it does not happen automatically - ask your pension provider.

What you’ll get

The amount you’ll get when you take your pension pot depends on:

  • how much was paid in
  • how well the investments have done
  • how you decide to take the money, for example as regular payments, a lump sum or smaller sums

You usually get 25% of your pension pot tax free.

The pension provider usually takes a small percentage as a management fee - ask them how much this will be.

Defined benefit pension schemes

These are usually workplace pensions arranged by your employer. They’re sometimes called ‘final salary’ or ‘career average’ pension schemes.

What you’ll get

How much you get depends on your pension scheme’s rules, not on investments or how much you’ve paid in. Workplace schemes are usually based on a number of things, for example your salary and how long you’ve worked for your employer.

The pension provider will promise to give you a certain amount each year when you retire.

You can usually choose to get 25% tax free. You’ll get the rest as regular payments.

When you can take your pension pot depends on your pension scheme’s rules - it’s usually 55 at the earliest.