A state pension is paid to you by the Government. The amount you get paid depends on a number of factors such as when you retire, and how many years you have paid national insurance. The age at which you can retire and receive a state pension is rising to 66 for both men and women by October 2020. This will almost certainly be higher by the time most of us retire.
If you would like to see what your state pension retirement age may be, click here to use the official calculator.
There are two main types of state pension:
- Old state pension – applies to those who retired before April 2016.
- New state pension – applies to those who retire on or after April 2016.
The table below illustrates the differences between the two types of state pension:
|Old State Pension||New State Pension|
Maximum Weekly Payment
£125.95 + additional pension
£164.35 + ‘protected payments’
Required NI Years for Full Payment
Required NI Years for Minimum Payment
The additional pension and protected payments come under the old state pension rules, and therefore do not apply to those who have not yet retired.
For more information on State Pensions, please visit here.
When you pay into a workplace pension, your employer contributes money too. There are two types of workplace pension:
- Final salary scheme (sometimes called a defined benefit scheme) –
When you retire, you receive a percentage of your final salary as an annual income. This is based on the number of years you have worked for that particular firm. An accrual rate is set by your employer which is a proportion of your final salary, for example 1/60th. For each year that you work for the firm, your final salary pension will increase by the equivalent of the accrual rate. Therefore if you work for the firm for 40 years with an accrual rate of 1/60th, your pension will be 40/60ths of your final salary.
With this type of pension, your employer bears all the risks involved with investing. This type of pension is becoming increasingly rare in the UK.
- Money purchase scheme (sometimes called a defined contribution scheme) –
When you pay into your pension pot, your employer will also contribute some money. This amount varies between firms, but most employers simply match your contributions. When you retire, the money in your pension pot is used to buy an annuity.
With this type of pension, you bear all the risks involved with investing. Most employers are moving towards providing this type of workplace pension only.
Individual pensions are especially important for the self-employed, however anyone can have an individual pension.
There are three main types of individual pension:
- Personal pension –
Your contributions are invested, usually into funds, to provide an additional income when you retire. These funds are managed on your behalf. Your employer can contribute to your personal pension.
- Stakeholder pension –
Stakeholder pensions are essentially the same as personal pensions, apart from the fact that they are lower cost. There is however less investment choice. An annual charge applies, which cannot exceed 1.5% for the first 10 years, then 1% after that.
- Self-invested personal pension (SIPP) –
These pensions are the most flexible in terms of investment choice, however they are more expensive. With a SIPP, you can invest your money in almost anything, including funds, shares, gilts and bonds. Click here to read about the advantages and disadvantages of the different types of investment.