What is a pension and what types are there?

When you want to retire (if you do at all), you still need an income to continue your lifestyle, this is referred to as a pension. If you have worked most of your life and paid your national insurance you will receive a state pension but for the majority of people this is not enough to rely on. A private pension or investments are therefore crucial to enjoy a comfortable retirement.

For a moderate lifestyle in retirement a single person will need £20,800 a year.

Reference PLSA

What types of pension are there?

There are a number of different types of pensions;

1. Defined contribution pension  - where your money is invested and the amount you get when you retire depends on how much you paid in and how your investments have performed.
2. Defined benefit pension,  more commonly known as a final salary pensions which means you receive a fixed amount, once you have retired, each year until you die. If you have a spouse or dependents they may receive a portion of this.The date you will receive this pension is determined by the scheme.
3. SIPP (self invested personal pension), where you invest in your own personal pension. Like an ISA it is a 'pension' wrapper for investments. It is often more flexible than your defined contribution pension allowing you to take money out earlier (55 years of age) and taking out 25% as a tax free amount. Your pension provider will can also claim tax back from your investments of 20% to 40% (dependent on your tax threshold) to invest into your SIPP.
4. ‍State pension - this is received if you have paid national insurance for at least 10 years, for a full state pension you will need to have worked 35 years (currently this is £9,333 a year).  The date you will receive your pension will depend on when you were born, as the age of eligibility has been changing and is expected to change further in the coming years.