What Type of Pension Do I Have?
Understand the main types of UK pension, how they provide retirement benefits and the difference between a pension structure, its investments and the options available at retirement.
Start with the pension structure
UK pensions come in many forms, but most can first be understood by identifying how the retirement benefit is provided.
Some pensions promise a defined level of retirement benefits under the scheme rules. Others build a pension fund whose eventual value depends on contributions, investment performance and charges.
Once that distinction is clear, it becomes easier to understand the particular features of the pension you hold.
Pension type and pension investments are not the same thing
Terms such as defined benefit, defined contribution, personal pension and SSAS describe pension arrangements.
Terms such as unit-linked, with-profits and ethical or ESG investing generally describe how money within an arrangement may be invested or managed.
The two main ways UK pensions provide benefits
Understanding whether a pension is defined benefit or defined contribution can tell you a great deal about how it works.
Defined Benefit & Final Salary Pensions
A defined benefit pension provides retirement benefits calculated under the rules of the pension scheme rather than simply providing an investment pot.
Final salary schemes are one form of defined benefit pension. Other schemes may calculate benefits using career-average earnings or another formula.
- Retirement income calculated under scheme rules
- Benefits may increase before or during retirement
- Spouse or dependant benefits may be included
- Scheme-specific guarantees can be valuable
- Transferring generally means giving up the scheme benefits
Defined Contribution Pensions
A defined contribution pension builds a fund from contributions made into the arrangement and the investment returns generated over time.
The eventual value depends on factors such as contributions, investment performance, charges and withdrawals.
- A pension fund is built over time
- Money is normally invested
- Investment values can rise and fall
- Charges can affect long-term outcomes
- Different retirement options may be available
Not sure what type of pension you have?
Pension statements and scheme documents can contain clues about how the arrangement works.
The terminology used by the provider can help establish whether the pension provides defined benefits, an investment fund or a more specialist arrangement.
Lost track of an old pension? →Does the statement show a pension fund value?
Does it quote a projected or promised annual pension?
Does it mention final salary or career average benefits?
Does it list investment funds or units?
Are guarantees or protected benefits mentioned?
Is the arrangement described as a personal pension or SIPP?
Common types of defined contribution pension
Defined contribution pensions can be established through an employer or arranged personally with a pension provider.
Workplace Pension
A workplace pension is provided through an employer. Depending on the scheme, both the employer and employee may contribute to the pension.
Personal Pension
A personal pension is generally arranged directly with a pension provider and is a form of defined contribution pension.
SIPP
A Self-Invested Personal Pension is a type of personal pension that can provide access to a wider range of investments and greater control over how pension assets are invested.
Small Self-Administered Scheme — SSAS
A Small Self-Administered Scheme is generally an occupational pension arrangement established by an employer, often for company directors or senior employees.
SSAS arrangements can provide greater involvement in investment and scheme decisions than many conventional workplace pensions.
Their rules can also permit certain forms of investment or transactions involving the sponsoring employer, subject to pension and tax requirements.
SSAS arrangements have specialist rules
The ability of a SSAS to hold commercial property, make certain loans or undertake other transactions does not mean these activities are unrestricted.
Scheme rules, pension legislation, tax requirements and the circumstances of the transaction can all be relevant.
Section 32 Buyout Policies
Some people still hold older pension arrangements established under rules that applied many years ago.
A Section 32 policy, sometimes called a buyout policy, is an individual pension arrangement that was historically used to receive benefits transferred from an occupational pension scheme.
Older pensions can contain important benefits
The age of a pension does not by itself indicate whether the arrangement is suitable or unsuitable.
Older policies can sometimes contain guarantees, protected benefits or other scheme features that may not be immediately obvious from the current fund value.
Understanding these features can be particularly important before considering changes to an older pension.
How is your pension invested?
With a defined contribution pension, identifying the pension type is only part of the picture.
The underlying investments influence how the pension fund behaves over time. Different pension arrangements can offer different investment ranges.
Investment choice can affect risk, diversification, volatility, potential returns and charges.
Investments may include
Unit-linked and with-profits pensions
These terms generally describe how money within a pension is invested rather than creating a completely separate category of pension.
Unit-Linked Investments
In a unit-linked arrangement, pension contributions are invested into funds divided into units.
The value of the pension is linked to the value of the units held, so the fund value can rise or fall as the underlying investments change in value.
With-Profits Funds
Some older pension arrangements invest in with-profits funds, where returns may be distributed through bonuses under the terms of the policy.
These arrangements can contain guarantees, bonus structures or other policy features that differ between providers and contracts.
Ethical and ESG pension investing
An ethical pension is generally not a separate legal type of pension. It usually describes the investment approach used within a pension.
Ethical, sustainable and ESG-focused funds may consider environmental, social or governance factors when selecting investments.
Different funds apply different criteria, so the meaning of “ethical” can vary considerably between investment managers.
Different funds can take different approaches
Some funds exclude particular industries or activities. Others actively select companies based on environmental, social or governance characteristics.
The investment objective, risk profile, diversification and charges remain relevant alongside any ethical or sustainability criteria.
Where do annuities fit?
An annuity is generally a retirement income product rather than a separate type of pension scheme.
Pension savings can potentially be used to purchase an annuity from an insurance company, which then provides income according to the terms selected.
Annuities can have different features
The income available can depend on factors including the amount used to purchase the annuity, prevailing annuity rates and the options selected.
Different arrangements can provide different forms of income, increases or benefits for another person after death.
Does moving abroad change the type of pension you have?
Moving overseas does not automatically change the underlying type of UK pension, but it can change the wider context in which the pension is managed and eventually accessed.
Your existing pension
Pension benefits, guarantees, investment arrangements and scheme rules remain important when assessing an existing UK pension.
Provider restrictions, tax residence and the country in which retirement income will be used can introduce additional considerations.
Considering the available options
Retaining an existing pension, consolidating eligible pensions or considering an overseas arrangement can have different implications.
Recent UK Pension Articles
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UK Pension Types FAQs
What are the main types of UK pension?
A useful starting point is distinguishing between defined benefit pensions, which provide benefits calculated under scheme rules, and defined contribution pensions, which build an invested pension fund.
Is a final salary pension a defined benefit pension?
Yes. A final salary pension is a form of defined benefit pension. The retirement benefit is calculated according to the scheme's rules rather than simply being based on an investment fund.
Is a personal pension a defined contribution pension?
Personal pensions are generally defined contribution arrangements. Contributions are invested to build a pension fund that can later be used to provide retirement benefits.
What is the difference between a SIPP and a personal pension?
A SIPP is a type of personal pension. It can provide access to a broader range of investments and greater control over investment selection than some other personal pension arrangements.
Is an ethical pension a different type of pension?
Usually not. Ethical or ESG generally describes the investment approach used within a pension rather than the legal structure of the pension itself.
Is an annuity a pension?
An annuity is generally a retirement income product. Pension savings can potentially be used to purchase an annuity that provides income according to the terms selected.
Can an old pension contain valuable guarantees?
Yes. Some older pension policies and schemes contain guarantees, protected benefits or other features that may be important when understanding the arrangement.
Does moving abroad mean I need to transfer my UK pension?
No. Moving abroad does not automatically require a UK pension to be transferred. The pension type, existing benefits, tax residence and individual circumstances can all be relevant when considering the available options.
Know what you have before considering what comes next
Understanding your pension type, benefits, guarantees, investments and retirement options can provide a clearer foundation for wider retirement planning.