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Types of pension

A pension scheme is a type of savings plan that can help you save money for later on in life. It's one of the best ways to grow your money steadily over time.

All pension schemes receive tax relief on personal contributions, but a workplace pension scheme, such as Nest, allows you to benefit even further because employers also contribute. These regular contributions are then invested so that they can have the best chance of growing across your working life to help you in retirement.

Read more on why it’s worth saving into a workplace pension.

The three types of pension

The language around pensions can sometimes be a bit confusing, so to make sure you know the options available to you, we’ll explain the three main types of pensions you’ll come across in the UK in the tabs below.

Sometimes called a ‘money purchase’ pension, they have recently become more common. A defined contribution scheme can be a personal pension arranged by you or a workplace pension arranged by your employer (such as Nest).

Money is paid in by you or your employer over time and is then invested by the pension provider. The size of the pension pot you’ll be able to take out when you retire depends on how much was paid in and the level of growth from the investments.

With a defined contribution pension you can also decide how to take your money out.

Declining in popularity, this type of pension scheme is sometimes referred to as a ‘final salary’ or ‘career average’ pension. It’s a defined benefit pension that’s nearly always a workplace pension arranged by your employer. 

The size of pension you receive when you retire depends on the amount you earn, the length of time you've been paying into the scheme, and the terms of the individual pension scheme. The defined benefit pensions scheme guarantees a certain amount for you to receive each year when you retire.

The State Pension is the name of the pension that you can get from the government when you reach State Pension age. It’s normally something that you have to claim rather than get automatically. 

The maximum you can currently get from the State Pension is £175.20 per week, but you can stay on top of any changes by checking the www.gov.uk website.

Accessing your pension

As a general rule, you can start accessing the money in any pension scheme from the age of 55 – however, it’s important to remember that the earlier you draw your pension, the lower the benefits will be, and you may wish to benefit from saving into your pension for longer. To do this for your Nest pension, simply defer by changing your retirement age. You can change this at any time by logging in to your Nest account.

It’s also worth remembering that under the Pensions Act of 2008, every employer in the UK is legally required to put certain staff into a pension scheme and make contributions into it – a process called auto enrolment.

Check out the multiple benefits of a workplace pension

Extra money from your employer on top of your contributions, tax relief and hassle-free control of your future are just some of the reasons why a workplace pension could be right for you.

Learn more about workplace pensions

Last updated: 10/20

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