Types of pension

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

There are three main types of pension in the UK. By knowing the basic features of each type, you’ll be in a better position to understand your own savings and plan properly for your future.

The three types of pension

Defined contribution pension

Sometimes called a ‘money purchase’ pension or referred to as a pension pot, these schemes are very common today. It could be a personal plan set up by you or a workplace pension, such as Nest, arranged by your employer.

Money is paid in by you or your employer over time and is invested by the pension provider. The size of your pension pot at retirement depends on how much was paid in and how well your investments have done.

It’s up to you how you take your money out of a defined contribution pension. You should spend time getting to know all your options before deciding what works best for you. At Nest, we try to make your choices at retirement easy to understand, so you feel in control.

Defined benefit pension

This type of pension scheme has declined in popularity. It’s nearly always arranged by your employer and is sometimes referred to as a ‘final salary’ or ‘career average’ pension.

Defined benefit schemes give you a guaranteed annual pension worth a certain amount at retirement. The value of your pension depends on your earnings, how long you’ve worked for your employer and the terms of the individual pension scheme.

State pension

This is the pension that you need to claim from the government when you reach State Pension age.

The maximum you can currently get from the State Pension is £203.85 per week, which works out to £10,600.20 per year. You can stay on top of any changes by checking gov.uk. The maximum you can get is dependent on your individual working history and how much NI contributions you have made in your working life.

Accessing your Nest pension

In general, you can start taking money out of your Nest pension from the age of 55. However, it’s important to remember that the earlier you access your pot, the lower its value might be. That’s because you’ve had less time to make contributions and we’ve had less time to grow your money. So, you might want to pay into your pot for longer to try and increase how much you’ll have at retirement. If you plan on leaving your money with us past your State Pension age, let us know when you’ll need it so we can manage it more effectively. You can do this by logging in to your Nest account.

Auto enrolment

As you go through your working life it’s likely that you’ll benefit from auto enrolment, which was introduced by the Pensions Act 2008. Under these rules all employers in the UK are legally required to put certain staff into a pension scheme and pay money into their pension pots. This is to help workers save as much as possible for their retirement.

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The benefits of a workplace pension

Extra money from employer contributions and tax relief are some of the many great reasons for saving with a workplace pension.

Explore workplace pensions