A guide to the pension system in the United Kingdom

Types of Pension Plans


Pensions are simple – you save a little money when you are working to pay the bills and to provide some luxuries when you are older and have less income. A pension comes in a few different types. Some are offered by employers and others are self-managed.

A personal or workplace pension is in addition to the state pension. The state pension pays £155.65 a week, although protected payments can add a bit more and some people who have less than 35 qualifying years of national insurance payments may get less. How much a workplace or personal pension pays depends on different factors.

Different types of pension

A final salary or defined benefit scheme is typically a workplace pension offering a guaranteed inflation-linked income based on how long you have worked for an employer and your income just before you retire.

A defined contribution scheme is a pension built up from contributions generally linked to stock market funds. The income payment depends on how much is in the fund on the day you retire. Pensions are considered the most tax-efficient way to save for retirement as the government tops up contributions made by you or your employer with ‘pension contribution relief’.

Every 80p a basic taxpayer saves, the government adds 20p, so every 80p saved adds £1 to the fund. Pensions are long-term savings plans. Savers cannot take any money from a workplace or personal pension until they are aged 55. For the state pension, this is extended until at least 66 years old. Other pensions, such as public sector or civil service pensions, may not start payments until the age of 60 or older.

Tax-free pension cash

Some pension schemes will allow you to retire later, but you should ask for permission or you may lose some benefits. Every pension bar the state pension pays up to a 25% tax-free lump sum. Depending on the scheme rules, you can leave the money in the fund to drawdown as you like, take regular payments or take all the money in one go.

How you take the money depends on the scheme rules and your personal financial circumstances. If the fund is larger than £30,000, you must take professional advice before the money is freed.