There are 3 main types of pensions:
- State pension
- Workplace pension
- Personal Pension
State Pension
I wont go in to too much detail on this as most people will have a state pension. By working and paying National Insurance, you will be contributing towards your state pension. This will pay you an amount each year that should be enough to get by on. It probably will not leave you much extra though.
Workplace Pension
A workplace pension comes in 2 forms, defined benefit and defined contribution.
Defined Benefit (also known as Final Salary) is not as common now as it once was. They have tended to be phased out since the 90s in favour or Defined Contribution pensions, although some employers do still have these, the benefit they provide has been watered down over the years (I speak from experience!).
Defined Contribution pensions are quite common now. They work by you making a payment each month via a deduction on your payslip. Your employer will usually match it up to a certain amount although you are able to pay in more should you wish. These became a legal requirement for most employers following changes to law in 2008.
Personal Pensions
As mentioned above, most employers offer a Defined Contribution pension where they will match what you pay it. It makes it a bit of a no brainer as your pension contributions are doubled at no cost to you up to a certain amount. There are legal minimums, but some employers will allow you to go above that.
But what happens if you want to pay more into a pension than your employer will match?
This is where things get interesting and complicated.
Option 1 – would be to just pay more into your work place pension. It is probably the easiest to do. But it may not result in the best return.
Option 2 – A SIPP (Self Invested Personal Pension). This is where you (or a financial adviser on your behalf) will set up a pension for you, you can then have more flexibility in where your pension is invested. If you have moral or ethical views, or risk factors there is a lot more that can be done to ensure the pension is tailored to your requirements and preferences.
It gives you the ability to invest in Shares, funds or investment trusts. There is also tax relief on payments into your pension – although this can change depending on govt policies so up to date advice is always recommended.
Summary
Going back to the original question of What type of pension should you get? – Well this is where a Financial Adviser can come in and help.
With so many factors at play, not just the different types of pensions but also risk appetites, an adviser can get to the bottom of what you want and narrow down the options to make it a much easier decision.