The different types of pension

When planning for your retirement it will help you to know the key information about all your pensions such as:

• Which pension providers your pensions are with. 
• When is your scheme or 'Normal' retirement date under your pension plan?
• What type of pension(s) do you have with each provider? 
• What is the current value of all your pension plans? 
• What is the estimated value of your pension plans at retirement?
• What income will your pensions pay you when you retire and what are the features and benefits attached to that income?
• Does the pension have a "guaranteed annuity rate"?
• Does the pension contain "guaranteed minimum pension"?

There are several types of pension and they fall into the following main categories:

• State pensions - the State Pension is a regular payment from the government most people can claim when they reach State Pension age. You can find out your State Pension age by using the calculator on the Gov.uk website. It depends on when you were born. The amount of State Pension you'll get depends on how many 'qualifying' years of National Insurance payments you have. 

• Personal pensions - are a type of money purchase or Defined Contribution pension scheme and are individual contracts between you, the member, and the pension provider. You build up a pension fund by investing your and/or your employer's pension contributions with an insurance company. Your pension pot builds up in line with the contributions you make, investment returns and tax relief.

• Occupational or workplace pensions - A scheme set up by an employer to provide retirement benefits for its employees. The most common types are Defined Benefit (DB) schemes (many of these are final salary schemes), and Defined Contribution (DC) schemes (also called money purchase schemes.)

Personal pensions have been available since 1988. Their predecessor, Retirement Annuity Contracts, are a type of pension scheme that were available to the self-employed, or workers not offered a workplace pension before July 1988.

Stakeholder Pensions (available since April 2001)

These are a form of personal pension. They have low and flexible minimum contributions, capped charges and a default investment strategy. You can start one yourself, but some employers will already offer one.

Self Invested Personal Pension (SIPP)

This is a type of personal pension and works in a similar way to standard personal pension. The main difference is that with a SIPP, you have more flexibility with the investments you can choose.

These are pension schemes provided for you by your work and generally there are two types: 

Defined Benefit scheme (also known as a "final salary" scheme)

A defined benefit pension pays you a retirement income based on your salary, how long you've worked for your employer and a calculation made under the rules of your pension scheme.

If you are a member of a Defined Benefit arrangement then the best way to learn how it works and what benefit you will receive in retirement is to study the scheme explanatory booklet or contact the administrators of the arrangement, who will be able to provide you with additional details. 

Defined Contribution scheme (also known as a “money purchase" scheme) 

Members of these schemes build up a pension fund through investment of personal and/or employer contributions during their period of membership.

These contributions build up over time, along with investment returns, to provide the member with a pot of money that they later use to generate a retirement income. It is essential that you  consider all the ways you can convert your pension savings into an income and then shop around for the best deal before making your final decision.

You should check whether your pension has a guaranteed annuity rate or other form of guarantee, and if you’re in any doubt ask your pension provider(s). These guarantees will often provide you with an income for life much higher than you might normally get.