What are pensions? A full guide.

If you’ve ever found yourself scratching your head, wondering what pensions are all about, you’re in the right place. We’re here to break down this seemingly complex topic into digestible, easy-to-understand pieces.

Pensions are an essential part of planning for the future, but let’s be honest – they can sometimes feel like a maze of information.

With this guide, you can start to turn that maze into a straightforward path, leading you towards a clearer understanding of how pensions work, why they’re important, and how they can benefit you in the long run.

Whether you’re just starting your career, are midway through it, or are nearing the retirement horizon, understanding your pension is important.

We’ll explore the different types of pensions, how they operate, and what they mean for your financial security.

Key points

• What are pensions?
• Pension types

What are pensions?

Essentially, pensions are a type of retirement plan where you regularly set aside a portion of your income so that you have financial support when you retire. This helps you maintain a comfortable lifestyle well into your retirement years.

Whether provided by the government, employers, or privately managed retirement funds, pensions play a big role in supporting you in your post-work life.

Types of pensions

There are various types of pension schemes, with the main three in the UK being:

• Personal pensions
• Government state pensions
• Workplace pensions

Understanding the different pension options gives you the information you need to enjoy your golden years to their full potential.

Personal pensions

Two common types of personal pensions are stakeholder pensions and self-invested personal pensions (SIPPs).

Stakeholder pension

A stakeholder pension is a low-cost pension plan that offers flexibility in terms of contributions and investment options. It is a type of personal pension scheme that has specific government requirements.

These include limits on charges, which means that the fees that can be charged by the pension provider are capped.

This ensures that people do not face excessive charges, and their overall pension savings are not eroded by high fees. Stakeholder pensions are designed to be simple, affordable, and accessible to a wide range of people.

Self-Invested personal pension

On the other hand, self-invested personal pensions (SIPPs) allow you to have more control over your pension fund investments.

With SIPPs, you have the freedom to choose and manage your own investments, including stocks, shares, and other investment vehicles.

This gives people the opportunity to potentially achieve higher returns on their pension savings by investing in assets that align with their goals and risk appetite.

However, it also means that you have more responsibility and need to have a good understanding of investing.

Government state pensions

The state pension is a regular payment made to people in the UK once they reach a certain age.

The current state pension age for both men and women is 66. However, this is set to increase gradually over the coming years.

Starting from April 2026, the state pension age will gradually increase to 67. This means that those born between April 6, 1960, and April 5, 1978, will be affected by this change.

The increase in the state pension age is due to the fact that people are living longer and the government wants to ensure the sustainability of the pension system.

When it comes to the amount of the state pension, not everyone receives the full amount.

The full state pension amount is currently £179.60 per week. To be eligible for the full amount, you need to have paid or been credited with National Insurance contributions for 35 years. Those with fewer than 35 years of contributions will receive a reduced amount.

Workplace pensions

Workplace pensions are retirement savings options that are arranged by employers for their employees. These pension plans play a crucial role in helping people save and secure their financial future after retirement.

In the case of workplace pension schemes, the two main types are defined benefit (DB) and defined contribution (DC) pensions.

Defined Benefit pension

A defined benefit pension scheme guarantees a specific income level for the retiree based on a predetermined formula.

The income is typically calculated based on factors such as salary, years of service, and a predetermined accrual rate.

This type of pension scheme places the investment and longevity risks on the employer, as they are responsible for ensuring the promised income level is met.

Defined Contribution pension

Defined contribution pensions operate differently. With this type of scheme, your pension income is based on the contributions made and the performance of the investments in the pension fund.

The final amount received depends on factors such as the:

• Contributions made,
• Investment returns earned
• Annuity rates available at retirement

Unlike defined benefit schemes, you take on the investment and longevity risks, as you are responsible for managing your own pension investments.

Take control of your pension planning with Spencer Churchill Claims Advice

Understanding pensions is key to securing a comfortable and worry-free future, and we at Spencer Churchill Claims Advice are committed to helping you achieve just that.

We believe in empowering you with knowledge and tools to make well-informed decisions about your pension and retirement.

With decades of experience under our belt, you can always count on Spencer Churchill Claims Advice for honest guidance every step of the way – we regularly support individuals fallen victim to mis-sold pensions and other forms of financial claims.