Most people get some State Pension. It’s paid by the government and is a secure income for life which increases each year.
You build up your entitlement by making National Insurance contributions during your working life. In some cases, you may even build this when you’re not working, such as when you’re bringing up children or claiming certain benefits.
Defined contribution pensions
With this type of scheme, you build up a pension pot which you can draw an income from in the future (post age 55). With this type of pension scheme, you can usually withdraw at least 25 per cent (a quarter) of your pot tax-free.
The amount that builds up depends on:
- the level of charges you pay
- how well your investment performs, and
- how much you and your employer (if you are employed) pay into the scheme
Defined contribution (DC) pensions include workplace, personal and stakeholder pension schemes.
Defined benefit pensions
You’re most likely to have a defined benefit (DB) pension if you work in the public sector or for a large company. This is a salary-related pension which pays out a secure income for life and increases each year.
The pension you get is based on how long you’ve been a part of the scheme and how much you earn.
You might have a final salary scheme where your pension is based on your pay when you retire or leave the scheme, or alternatively a career-average scheme where your pension is based on the average of your pay while you were a member of the scheme.