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A No Nonsense Guide to Different Pension Plans

 

People often find pensions confusing. Therefore, in this article we will start from scratch and look at the basics. What is a pension and what different types are available.

A pension is effectively an investment or savings plan that should provide you with a decent income for when you retire from work. Within that framework though, there are many different types of pension, each with benefits and drawbacks.

Here is a concise guide to some of the most commonly used plans, from company pensions to SIPPs.

 

 

Work or Company Pension

One of the most traditional pensions, a Work or Company pension enables you to accumulate a pension fund throughout your working life. These types of pensions are set up by your employer and will provide retirement benefits for as long as you are employed by them.

You’ll be required to make regular payments to this fund, normally based on a percentage of your salary in the Work pension scheme. In most cases, your employer will match the contributions you make towards your pension, making this a very reliable and financially stable approach.

 

Personal or Private Pension

A Personal or Private pension is a type of money purchase plan arranged by yourself, as opposed to your employer. In this type of pension, contributions can be made in a variety of different ways (regular payments, occasional lumps sums or a mixture of both) and upon retirement, 25% of the money saved can be taken as a tax-free cash lump sum. The only downside to this approach is that the remainder of the money (for now, at least) must be used to purchase an annuity.

 

Self Invested Personal Pension (SIPP)

A Self Invested Personal Pension (SIPP) is basically a personal pension without all of the restrictions. Unlike standard personal pensions, a SIPP gives you complete freedom to manage your own investment decisions, whether through stocks, shares or any other asset of your choice.

As well as this, any contributions you make towards your SIPP will be eligible for tax relief, up to a certain point. This flexibility is no doubt the reason that more people these days are moving away from conventional personal pensions and towards SIPPs.

 

 

Investing in the Future

The basic premise of a pension is the same across the board: put aside money now in order to have a comfortable life later on. Obviously though, there are many different ways to achieve this end goal, the most common of which are listed here.

If you want more detail about whether a pension is right for you (e.g. is it better than a NISA), check out our more detailed article on pensions.

Hopefully with this information, you will be far better informed when you come to select your own pension plan.