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 can usually take up to 25% of the amount built up in any pension as a tax-free lump sum. The most you can take is £268,275.

If you hold a protected allowance, this may increase the amount of tax-free lump sum you can take from your pensions.

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 take up to 25% of the amount built up in any pension as a tax-free lump sum. The most you can take is £268,275.

If you hold a protected allowance, this may increase the amount of tax-free lump sum you can take from your pensions.

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

Part of Plan your retirement income: step by step

  1. Step 1 Check when you can retire

    1. Check what age you can get your State Pension
    2. Find out about working after you reach State Pension age
    3. Find out if you can retire early with your workplace or personal pension

  2. and Check how much pension you could get

    1. Find out how much State Pension you could get (your forecast)

    You may also be paying into a:

    1. Find out if you’ll pay tax on your pension
    2. Find contact details for a lost pension

  3. Step 2 Increase your pension

    You might be able to increase the amount you get if you delay your pension.

    1. Find out about delaying your pension

    You might be able to pay voluntary contributions to fill in gaps in your National Insurance record (such as, from when you were not working or claiming benefits).

    1. Check if you can pay voluntary National Insurance contributions

    For advice about increasing your workplace or private pension, speak to a financial adviser.

    1. Find a financial adviser through Unbiased

  4. Step 3 Check what other financial support you could get

    Check what financial help you could get if you:

    You can also get free bus travel if you:

  5. Step 4 Decide when to retire

    1. Get advice on planning your pension and deciding when to retire