Types of Pensions

There are various different types of pensions available. You will find bellow a description on the most popular pensions.

  • Frozen/Dormant Pensions

A dormant or frozen pension is any company or personal pension scheme that you are no longer paying into, usually because you left the company.

Whilst these pension pots are not receiving any further payments from your ex-employer, they are still invested on your behalf in the stock markets and are still subject to fees, which come out of your pot every year.

Now something that many of you may not know is that many companies are actually charging their ex-employees more for their pensions, after they leave the company. This is known as an active member discount and can account for up to 0.05% per annum more in charges this is only one of the many hidden charges that a lot of pensioners are incurring.

  • Additional Voluntary Contributions (AVC):

As a member of an Occupational Pensions Scheme, payments in the form of Additional Voluntary Contributions can be made above the normal level of contribution to gain additional pension benefits.

  • Personal Pensions / Private Pensions

A personal pension is usually arranged by yourself, not your employer, and is a type of money purchase plan.

A personal or private pension is a tax-efficient savings plan that enables you to save for retirement. Your pension contributions attract tax relief (up to annual limits) and can be made in various ways, either regularly or by lump sum, or a combination of both.

On retirement, up to 25% of your pension fund value can be taken as a tax-free cash lump sum. The remainder of the funds left in your pension pot can then be used to buy an annuity (a guaranteed income for life in return for a lump sum investment) or left invested to produce an income directly from the fund. Alternatively, you could withdraw the whole fund as a taxable lump sum.

  • Company Pension / Workplace Pension Scheme

A Company Pension Scheme (otherwise known as a Workplace or Occupational Pension) is a pension that is set up by your employer to provide retirement benefits to you while you are employed by them. It allows you to accumulate a pension fund during your working life. You will usually be required to make regular pension contributions based on a percentage of your salary into the workplace pension scheme. It is customary for your company or employer to match the level of contribution you make. Over the next few years, most employees will be auto-enrolled into a pension scheme.

  • Final Salary Pension Scheme

A Final Salary (or Defined Benefit) scheme is a type of occupational pension where the amount of retirement income is based on your final salary. These are becoming less common. But these can be some of the best schemes that are available as most guarantee you an amount at retirement.

  • Money Purchase Pension Plan

A Money Purchase Pension Plan or Defined Contribution Plan is a pension scheme where the final benefits are not linked directly to your salary. You (and maybe your employer) pay regular contributions into your pension pot. Upon retirement, the total pool of capital in your pot can be used to take an income in retirement. The amount in each money purchase plan member's account will differ from one member to the next, depending on the level of contributions and investment return earned on such contributions.

  • Self Invested Personal Pension (SIPP)

A Self Invested Personal Pension (SIPP) is a type of personal pension. A SIPP is a pension plan that gives you the freedom and control to totally manage your own investment decisions by buying stocks and shares and a range of other types of assets. Any contributions that you make to a SIPP will receive tax relief, up to certain limits. You are also able to select your own pension manager and select different funds that you wish to be invested in. In many circumstances this means that the fees you pay are significantly lower than you would for other pension schemes.

  • Stakeholder Pensions

A stakeholder pension works in a similar way to other personal pensions whereby you pay money into your pension to build your pension fund. However, they must adhere to Government rules and minimum standards on annual management charges, access and terms to ensure they offer value for money, flexibility and security.

You can switch to a different pension provider without the provider you leave charging you.

You can start contributions from as little as £20, and pay weekly, monthly or at less regular intervals.

You can stop, re-start or change your contributions whenever you want – there are no penalty fees.

The scheme must be run by trustees or by an authorised stakeholder manager, whose responsibility will be to make sure that the scheme meets the various legal requirements.

  • State Pensions

A State Pension, also know as a Government Pension or Old Age Pension, is a pension that is accumulated during an individual's lifetime and paid by the Government when they reach state pension age.

A state pension value is based on the number of years of National Insurance (NI) contributions made throughout the person's working life.

  • Unit Linked Pension

Pension contributions made to money purchase plans may be made into unit linked pension funds. Pension contributions are used to buy units in a pooled fund (or funds). Unit linked pensions are invested in a variety of funds. The funds are grouped together in sectors, representing the style, area and risk level in which the relevant pension fund has chosen to invest. As the value of the units may fall and rise during the period of investment, care is taken to 'spread' the investment in a variety of ways to obtain the best return commensurate with prudent investing.

  • Unitised with Profits Pension

Pension contributions made to money purchase plans may be made into Unitised with profits funds. With profits pension scheme payments are used to buy units in an insurance company's with profits fund. The value of these units increases annually depending on the investment performance and profits of the insurance company.