Types of pension scheme

Whatever your retirement goals a pension can provide a tax-efficient way to save. There are a number of types of pensions to choose from, in this guide we look at what’s available and who they might suit.

Saving for retirement: the benefits of a pension

Pensions can provide a good way to save for retirement because they offer tax benefits that can help your money grow faster.

Read more in our guide to pension tax relief for more information.

Your money is also locked away until you reach the age of 55, so there isn’t the temptation to dip in before then.

Types of pension: Defined-benefit and defined contribution schemes

There are two main types of pension scheme:

  • defined contribution schemes


  • defined benefit schemes

Defined benefit schemes, on the other hand, promise a defined income for retirement and are only offered as workplace pensions, you can’t set up your own.

Defined contribution schemes, also known as money purchase schemes, are a type of pension scheme where the performance of your investments, your contributions, and any contributions that your employer makes, determine the size of your pension pot on retirement.

Defined contribution schemes can set up by you, or offered as a workplace pension. There are a number of different types of defined contribution schemes, including personal pensions and SIPPs, all of which work differently, so it’s a good idea to explore your option.

Let’s look at the different types of defined benefit scheme in more detail:

Personal pensions

These are pensions which you set up for yourself, for people who want to supplement their workplace pension or for those who don't have one – for example self-employed people.

Self-invested personal pensions (SIPPs)

Are a type of personal pension that give you more flexibility and control over how your pension is invested. Because you’re making your own investment choices, they’re most suited to those who already have experience investing for themselves.

Find out more by reading our guide to SIPPs.

Stakeholder pensions

This is a simplified, more flexible style of personal pension. Stakeholder pensions must meet certain government criteria, including:

  • Management charges can't be more than 1.5% of the fund's value for the first 10 years and 1% after that
  • You must be able to start and stop payments when you want, and switch providers without being charged
  • Certain security standards must be met – for example, the pension must have independent trustees and auditors

Stakeholder pensions are also different in that you can pay in as little as £20 at a time. The flexibility offered by this kind of pension makes them popular with self-employed people.

What next?

Speak to a financial adviser to help you find the right retirement savings option for you.

If you’ve already started saving you can use our pension calculator to estimate how big your pension pot will be when you reach retirement.

Last updated: 05 June 2015