Defined benefit (DB)<\/h4>
These pay out a fixed, regular income when you retire, based on a percentage of your salary during your time at the company. The percentage is calculated based on the years you\u2019ve worked at a company. Defined benefit schemes are becoming increasingly rare, as the company has full responsibility for ensuring there\u2019s enough money in the pot to pay retired employees\u2019 pension income. This can prove expensive. The most common type of DB pension is final salary, where your income is based on your salary when you left the company. But some organisations also offer career average DB pensions, based on your average salary. <\/p><\/div><\/article><\/div>
Defined contribution (DC)<\/h4>
This is now the most common type of pension. Money paid in by you and your employer is invested by the pension provider. The idea is that these investments will grow enough over time to provide a worthwhile return to help fund your retirement. But, as we all know, investment performance is not guaranteed, so the value of your pension pot when you retire isn\u2019t set in stone. When you retire, you can take the cash out (all at once or gradually over time), leave it invested or use it to buy an annuity.<\/p><\/div><\/article><\/div><\/div>
Personal pensions<\/h4>
A personal (or private) pension is one that you set up yourself and choose how much to pay into. You can contribute a regular amount or occasional lump sums. If you wish, you can take out a personal pension even if you already have a workplace pension. You can opt to manage it yourself or choose a provider that will manage the pension for you.<\/p>
As with workplace pensions, you get tax relief on money that you pay in, which boosts the value of your pension pot.<\/p>
Almost all personal pensions are defined contribution (DC) schemes so, as with workplace DC schemes, there\u2019s no certainty over how much you\u2019ll have in your pot when you retire; it all depends on the performance of your investments.<\/p>
There are 3 main types of personal pension:<\/p>
- Standard\/simple personal pensions.<\/strong> These are offered by most large pension providers and some newer challengers to the market. You can usually choose the type of investment strategy for your pension pot (e.g. high vs low risk or a focus on ethical investments), but you don\u2019t have nuanced control over your investments. Instead, the strategy is applied and managed by the pension provider.<\/li>
- Stakeholder pensions.<\/strong> These are similar to standard pensions, but there are strict government rules about how they\u2019re managed. Annual management charges are capped (though they\u2019re not always the lowest available), they allow low minimum contributions and you can stop and start payments and transfer out at no cost. Investment options tend to be limited.<\/li>
- Self-invested personal pensions (SIPPs)<\/strong>. SIPPs<\/a> give you much more control over how your money is invested. You choose which specific investments you put money into and actively manage those investments. There\u2019s typically a wider and more sophisticated range of investment options than other personal pensions, though this choice may come with higher investment charges. They tend to be better for more experienced investors that make larger contributions and\/or have a larger pot.<\/li><\/ul>
In the same way as with workplace pensions, when you retire, you can take money out of a personal pension scheme, leave it invested and\/or buy an annuity.<\/p>
\n\n\n\n - Stakeholder pensions.<\/strong> These are similar to standard pensions, but there are strict government rules about how they\u2019re managed. Annual management charges are capped (though they\u2019re not always the lowest available), they allow low minimum contributions and you can stop and start payments and transfer out at no cost. Investment options tend to be limited.<\/li>