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But that doesn’t mean they’re not confusing to get your head around – especially when it comes to understanding what each type of pension is, and how they can benefit you when it’s time to give up your day job and enjoy some well-earned rest.
Yes, that’s right – there isn’t just your workplace pension to think about (or ‘pensions’ if you’ve had multiple jobs over the years and haven’t transferred them all into one pot).
So, what are the different types of pensions you could have?
Well, you could be entitled to the state pension (which is paid to you by the Government) or want to consider opening something called a ‘personal pension’ to help you boost your savings and have more to retire with.
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But if you haven’t heard of these types of pensions before now, don’t worry.
We’ve broken them down in this article for you (such as how they work, when you can access the money in them, and whether you’ll pay any tax), so you can assess your options and plan for your dream retirement.
The state pension
This is a regular payment you’ll start receiving from the Government when you reach state pension age. This can vary depending on when you were born, and you can check yours by using the ‘check your state pension age’ tool on the Government website.
Now, this is where things might get a bit confusing. There are actually two types of state pension: the basic state pension and the new state pension.
Not sure which one is likely to apply to you? Check below:
- The basic state pension is available for men born before 6 April 1951 and women born before 6 April 1953 – meaning that anyone who is eligible is already state pension age.
- The new state pension is available for those who were born on or after the above dates.
With both types of state pension, you’ll need to have a certain number of qualifying years on your National Insurance record to receive any payments.
A ‘qualifying year’ is when you have:
- Worked and paid National Insurance contributions
- Received National Insurance credits (due to receiving benefits)
- Paid voluntary National Insurance contributions
As those who are eligible for the basic state pension should already be receiving it (unless they’ve deferred their payments), we’ll just focus on the new state pension going forward.
For this, you’ll need to have 10 qualifying years on your National Insurance record, and 35 years if you want to claim the full amount (more on this in the section below).
If you think you have gaps in your National Insurance record and are worried you won’t be entitled to anything, you can check your state pension forecast and see how much you could get.
But don’t worry if you don’t think you’ll have enough qualifying years by the time you can claim it. You may be able to make voluntary contributions to fill in the gaps in your record.
However, something that’s important to remember is that when you reach state pension age, you won’t just start getting it automatically. Although you should receive an invitation letter just before you’re eligible, you’ll need to claim it, which can be done online, or by phone or post.
And just FYI, you can check your state pension age here (as it depends on when you were born).
How much state pension will I get?
As we’ve already explained, this depends on how many qualifying years you have on your National Insurance record – and you can check yours using the Government’s state pension forecast tool.
If you’re entitled to the full rate for the new state pension, this is currently set at £221.20 per week for the 2024/25 tax year. However, state pension payments are set to increase by 4.1% when the new tax year starts on 6 April 2025.
Something to bear in mind is that the amount does currently increase each year – so if your retirement is still a while off yet, it will be different by the time you reach state pension age.
And something that could impact the amount of money you get is whether you’ll need to pay tax – which we’ll cover next.
Do you pay tax on state pensions?
Like with any source of income, if you earn more than your Personal Allowance in a given tax year, you’ll be taxed on the portion of your pension that falls outside of this (and if you don’t know what your allowance is, then why not check out Wealthify’s guide to income tax brackets and how they impact savings?).
As it currently stands, you won’t pay tax on the new state pension if that’s your only income (as it falls short of the Personal Allowance). However, if you have money coming in from other sources, and this takes your yearly earnings above this, you will be required to pay it.
Sources of income could include the following:
- Employment (if you continue working)
- Payments from workplace pensions and personal pensions
- Any benefits you receive that are taxable
- Profit you make from your investments
- Interest earned from money you have in savings accounts
- Rent you get from tenants (as a landlord)
When it does come to taking money from a private pension (AKA a workplace pension or personal pension), you can usually take 25% as a tax-free lump sum (as long as it’s no more than £268,275) when you hit a certain age (which is currently 55 for most schemes).
This won’t impact your Personal Allowance.
However, do remember that you can’t withdraw a lump sum from your new state pension.
Another thing to keep in mind is that the tax treatment of pensions will depend on your individual circumstances, and this may be subject to change in future.
Workplace pensions
If you’ve been employed, then you’re probably already familiar with workplace pensions, and you may have multiple ones you’ve paid into over the years. But do you know how they actually work?
Let’s start with the basics. Typically, you’ll be enrolled into a workplace pension by your employer when you start working for them (assuming you meet the following criteria):
- You’re aged between 22 and state pension age
- You earn at least £10,000 per year
- You spend most of your time working in the UK
There are two types of workplace pension schemes you could be enrolled into:
- Defined benefit schemes: These will pay you a guaranteed income for the rest of your life from the day you retire, and the amount you’ll get could increase each year.
- Defined contribution schemes: The money paid in is invested in the stock market by your pension provider (which is chosen by your employer), and the amount you’ll get when you retire will depend on factors like how much has been paid in, how much has gone on fees, and how your investment has performed (as markets can go up and down).
As you’ll already know if you’ve had one, both you and your employer will pay into your workplace pension each month, and you’ll both stop paying in if you leave that job.
With most automatic enrolment schemes, your contributions will be based on your total earnings between £6,240 and £50,270 per year (before tax).
The minimum contribution is 8% of any qualifying earnings, with your employer being required to pay in at least 3% – meaning you’d need to pay the remaining 5%. However, your pension scheme could have different rules that impact how much you both pay in.
You may also be able to increase your contribution to boost your pot.
And one thing to note is that if you pay income tax, the Government will usually add money to your pot in the form of tax relief. You and your employer may also agree to opt into the ‘salary sacrifice’ scheme, where you give up part of your salary to be paid directly into your pension. In some cases, this means you both pay less tax and National Insurance.
Can I withdraw my workplace pension early?
Currently, the earliest age you can withdraw money from a workplace pension is 55, although this is changing to 57 from 6 April 2028. However, this won’t impact those who have been enrolled in firefighter, police and armed forces public service schemes.
This minimum age also applies to personal pensions – which are another type of private pension, and something we’ll be covering later.
However, something important to bear in mind is that this can vary from provider to provider, and some may have a different minimum age you can access your pension.
Now, the rules do change if you’re suffering from a health condition. In these cases, you might be able to withdraw early, although you’d need to check this with your provider.
But what if you’re not seriously ill and just want to retire sooner?
There are companies out there that claim they can help you take your pension early, but this is by making ‘unauthorised payments’ (AKA, they’ve been made outside of the Government’s tax rules). So, if you take them up on their offer, you could pay up to 55% tax.
When it comes to withdrawing money from a workplace pension (in an authorised way!), there is the option to take 25% as a tax-free lump sum (as we’ve already touched on earlier in this article), and you can do this for each of your workplace and personal pension pots. However, you will have to pay tax on the rest of your savings in them.
Once you’ve done that, here are your options you could have when it comes to accessing the rest of the money in your pension pot (if you’re part of a ‘defined contribution’ scheme):
- Buying an annuity: This is something you can buy from an insurance company or pension provider to give you guaranteed payments for life (or for a specified length of time), so how much you’ll get will depend on how long you’re expected to live.
- Bringing it into drawdown: This is when you gradually withdraw money from your pension to give yourself an income – meaning that some of it stays in the pot and remains invested, giving it the potential to carry on growing if your investment performs well.
You may also be able to take cash directly out of your pension pot – whether that’s the full amount or smaller lump sums.
Can I change my workplace pension provider?
You may think that you’re locked into the pension provider your employer has chosen for you, but there could be the option to change to a different one if your employer’s scheme lets you.
Here are some reasons why you might want to change your workplace pension provider:
- You’ve found another provider with lower fees
- You’d rather your money is invested in a different way, or better aligned with your values
- You want to consolidate it with past pension pots
However, this is something that you’ll need to check with your current provider to make sure there aren’t any restrictions, as not all schemes will allow you to transfer.
Plus, whether it’s the right decision to transfer your pot will also depend on your personal goals and circumstances. And your current scheme may have alternative investment options you could explore instead of moving to a different provider – so this could be worth exploring.
Self-invested personal pensions
Self-invested personal pensions, known as ‘SIPPs’ for short, are pension pots that you can open yourself as a tool to top up your state pension and workplace pension(s) – or even to use in lieu of a workplace pension if you are self-employed.
They could be especially useful to have if you’ve done the calculations, and the forecasts for your retirement look like you’ll have less money in your pocket than you thought.
Although the name suggests that you’ll be knee-deep in the stock market yourself (meaning you’ll be responsible for doing your own research and deciding where the money in your pot is invested), this isn’t necessarily true. ‘Self-invested’ simply means that you open and pay into it yourself, and have more flexibility over where your money is invested.
And this could be on a DIY basis, or with the help of a professional provider that does the investing for you – like Wealthify.
SIPPs are quite handy to use as personal pension pots where you transfer any old ones you have (from past jobs, for example). This could make them easier to manage, as your retirement savings will be in fewer places.
Are personal pensions taxable?
While pensions are considered to be tax-efficient products for your future retirement fund, they’re not completely tax-free.
Just as your workplace pension would be, personal pensions are subject to tax on withdrawal – however, you do get a tax-free withdrawal option for the first 25% you pull out when you reach the retirement age that applies to your scheme. The remaining 75% is then taxable.
You do also get a 25% basic-rate tax relief top-up from the Government for anything you personally contribute. So, for every £80 you invest (as an example), £20 can be claimed as a ‘top-up’ – taking it up to £100.
However, do remember that any additional relief for higher-rate taxpayers will need to be claimed on your self-assessment tax return.
Plus, as the value of your investments hopefully increases over time, this growth will be tax-free. This is because UK dividends earned from your SIPP are not subject to dividend or capital gains tax.
Can I have a personal pension and a workplace pension?
Yes, you can have as many personal pensions (or SIPPs) as you like without them impacting your existing workplace one (although they may be more difficult to manage if you have multiple pots on the go).
For example, you may have started out your career with only a personal pension as a self-employed individual, before later joining a workplace scheme after a job change. Or vice versa.
You may have many past pensions from your previous employers and have decided to open a SIPP to transfer these into one easier-to-manage place.
Do keep the rules around tax and your annual pension allowance in mind, though, as you’re only allowed to save and/or invest a certain amount over each tax year in a tax-free manner.
For most people in the UK who are saving for retirement, they can save up to their UK annual earnings or £60,000 per tax year (whichever is lower) without facing any additional tax implications. However, there are slightly different rules depending on which type of pension you have.
For example, defined contribution pension schemes would include:
- What you contribute personally
- Any additional tax relief added on top
- Contributions from your employer
- Anything someone else contributes on your behalf
A defined benefit pension allowance, on the other hand, will tally up how much your pension has increased in value over the past tax year.
For more information about personal pensions, please refer to Wealthify’s guide ‘How Does a SIPP Work?‘.
Considerations when choosing types of pensions:
Whether your pensions fall under the category of ‘workplace’, ‘personal’, ‘state’, or a blend of these different types – what’s really key for your financial security in retirement is planning ahead.
It’s likely that you don’t want to feel short-changed as you wave goodbye to your working life, so this forward planning is what can help you be financially supported, prepared, and comfortable in your retirement years. Here are some considerations for each type:
- State pensions are currently capped at £221.20 per week to those that are eligible – check your outgoings in your monthly budget to see how far this will stretch.
- Depending on which workplace pension scheme you have, these can only offer a limited choice with how your money is being invested. Your values and investing style don’t tend to be factored in on an individual level. So, if this bothers you, ask your employer whether there are any alternative schemes or investment plans to explore.
- If you have any past workplace pension pots, it’s worth considering whether to transfer them into one easier to manage pot. But do consider and compare fees, exit charges and the like – and remember, defined benefit pensions (usually seen in public sector roles) may not be transferrable as it may not be in your benefit to do so. Seek independent financial advice if you’re unsure whether it’s the best decision for you.
- Personal pensions (like the ‘SIPP’ that Wealthify offers), could give you more flexibility with your investments and easily allow you to transfer those past pension pots. If you have some spare cash that you’d like to be contributing to a self-invested personal pension, like the SIPP, then this scheme could be an option to consider.
When comparing which personal pension is right for you, do consider the provider’s fees and charges. Wealthify, for example, can offer you low management fees. This includes a 0.6% annual management fee, which drops to 0.3% for any portion of a pension valued at £100,000 or above.
Finally, if you’d like to approach your retirement planning now, it would be helpful to have an idea of what your projected value of each of your pensions could be in the future.
While there’s no guarantee that financial markets will perform exactly as predicted, you can get an idea of how much extra you could be contributing now (whether to a workplace or a personal pension pot) to bulk up your retirement funds.
With investing (such as through a workplace or personal pension), your capital is at risk – meaning you could get back less than you invested.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
The sponsor of this article is Wealthify Limited. Wealthify is authorised and regulated by the Financial Conduct Authority. Neither Wealthify nor YourMoney.com provide financial or tax advice. Please seek financial advice if you are unsure about investing.
