06 April 2024

Over the years, the way we work has changed a lot.

And pensions have changed with it.

They’ll still help you save for the long term, and they’ll also give you the flexibility that both modern careers and good retirement planning demand.

But there are several different types of pension available.

So how does each one work? And which type of pension is best for you?

Different types of pension plan

There are three different types of pension UK savers can get:

  • State Pension
  • workplace pension
  • personal pension.

Most people who have had a job will be able to draw on the State Pension when they retire. As of February 2023, the government was paying it out to about 12.6 million people. The amount you’ll get will depend on how many years you’ve paid National Insurance (NI) contributions.

Most people who’ve been in permanent employment will have at least one workplace pension. On average, we have 11 jobs in our lifetimes, so you could end up with up to 11 pensions through them. That’s actually quite rare though – in fact, only 15% of people have four or more.

And if you’ve been a freelancer or just wanted to save a little extra, you might have a personal pension, too. In 2021-2022, about 7.5 million people across the UK were paying into one.

State Pension

The UK State Pension is the pension that the government pays most of us when we reach 66, or 67 after 2028. For 2024/25 this is:

  • £221.20 per week
  • £11,502.40 per year.

To get the full amount, you’ll need 35 years of contributions for NI credits (which you can also get if you’re unemployed, ill or a parent or carer). You can’t claim it if you’ve paid in for less than ten years.

If you haven’t paid NI for 35 years, the government will base your payments on how many years you have paid it for. You get 1/35 of the full amount for every year you’ve paid in. For example:

  • 30 years gives you 30/35 x £221.20, which is £189.60 a week
  • 15 years gives you 15/35 x £221.20, which is £94.80 a week
  • 10 years gives you 10/35 x £221.20, which is £63.20 a week

You might be able to top up any NI gaps by paying voluntary contributions.

You can find out more about the State Pension and check your eligibility on Gov.uk. On its own it probably won’t fund your ideal retirement. So you’ll need to check that you’re saving enough elsewhere to top it up.

Workplace pensions

Workplace pensions are the pensions that employers set up for you. Each new employer usually has to create one for you when you join, if you’re:

  • aged between 22 and State Pension age
  • earning at least £10,000 per year
  • working in the UK.

They’ll probably set up a defined contribution pension for you. It will pay out an amount based on how much money you put into it over the years and how well your investments do. You might be able to control how your money’s invested – check with your employer or provider for details.

Defined contribution pensions are the most common type of workplace pension, but they’re not the only one. You might also have a defined benefit pension from a past employer. They pay out an amount based on your salary when you retire or leave the company. These days they’re pretty rare.

Paying into different types of workplace pension

Once your workplace pension is set up, you’ll start saving a small percentage of your salary straight into it. The government will usually add a little as tax relief. Your employer will probably match some or all of your contributions too, from a minimum of 3% up to a maximum they’ll set themselves.

Of course, paying into a workplace pension cuts down your take-home pay. But that can mean you start getting or increase any existing tax credits or income-related benefits. It can also reduce any student loan repayments you have to make.

Our “Should I be saving into a pension?” article will talk you through workplace pensions in more detail, and help you decide how much to save into yours.

Personal pensions

Personal pensions are the pensions that you set up for yourself. Just like a workplace pension, you can save as much into them as you want to, for as long as you need to, although the amount you receive tax relief on is restricted.

A personal pension might be a good choice if you:

  • are self-employed
  • are looking for pension contribution flexibility
  • want to consolidate your pension pots, from other workplace or personal pensions
  • want to choose from a small range of funds based on your attitude to risk.

Our Personal Pension page introduces our own product, and will help you understand how it works and why it might be a good choice for you.

Taking money out of your workplace or personal pension pot

You can choose when you start taking money from your pension pot. It’ll usually be when you’re 55 or older, increasing to 57 from April 2028. You’ll be able to take up to a quarter of the money in your pot as a tax-free lump sum. You’ll usually pay tax on the rest.

You can take your money out:

  • as cash
  • by buying an annuity, which will give you a guaranteed income for life or a fixed period
  • by opting for drawdown, to take out however much you need whenever you need it
  • or as smaller lump sums.

Your provider will talk you through your annuity and drawdown choices. If you don’t like what they’re offering, you’re free to transfer your pot to another provider.

What’s the best type of pension for you?

There’s often no single best type of pension. Saving into other types of pension scheme is often the right choice. That’s because the State Pension on its own may not be enough to fund most people’s retirement, so topping it up with another type of pension could be a good idea.

  • Start by thinking about how much you might need for your ideal retirement. The Retirement Living Standards website will help you see how much different lifestyles can cost.
  • Many women have smaller pension savings than men when they get to retirement, known as the gender pensions gap. 
  • If you have several pension pots, you might want to consolidate them into one pension. It could:
    • Save you high annual fees you might not realise you’re paying
    • Give you a clearer picture of where you are with your retirement savings
  • If you have a workplace pension, it’s always worth checking that you’re making the most of any matched contributions your employer might offer – check with them for more details.
  • And always remember that, as with any investment, your pension's value can go down as well as up.

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