What are the different types of pensions in the UK, and which one is right for you?

With so many options available, UK pensions might feel confusing. Learn about the different types of pensions to help you decide which is right for you.

Starting from October 2012, UK employers began automatically enrolling their staff into a workplace pension. It is now mandatory for all businesses to enrol eligible employees into their pension schemes.

While this system helps to ensure that individuals have a retirement fund in place, it may also have contributed to a widespread lack of engagement with pensions.

According to Standard Life (10 December 2024), 1 in 4 (24%) UK adults aged 55 and over have never checked their pensions. Additionally, women are more likely to fall into this category, with 19% saying they’ve never reviewed their pension – almost double the number of men (10%).

The research found that the main reason for not engaging with pensions was a lack of awareness and knowledge.

Yet, taking control of your pensions and ensuring that your funds are being invested and managed in a way that aligns with your long-term goals is a crucial part of effective retirement planning.

Keep reading to learn about the different types of pensions available in the UK so that you can make an informed decision about which one may be right for you.

Defined contribution pensions – Income depends on contributions and investment performance

This is the most common type of workplace and personal pension in the UK.

Figures published by The Pensions Regulator (May 2024) show that as of 31 December 2023, 27,152,730 individuals had a defined contribution (DC) pension or “money purchase” scheme, compared to just 5,803,750 who had a defined benefit (DB) pension (more on this below).

Who contributes to your defined contribution pension

If you’ve been auto-enrolled into a workplace pension, you and your employer must contribute at least 8% of your salary – with your employer paying a minimum of 3%.

Your employer will usually deduct your combined contributions from your salary before it is taxed.

If you have a private DC pension, you’ll likely be responsible for arranging your contributions. You can open your own pension and ask your employer to pay into this, but they are not obligated to do so.

How your defined contribution pension pot could grow

You’ll receive tax relief on any personal contributions you and your employer make up to £60,000 – your Annual Allowance for the 2024/25 tax year – or 100% of your earnings, whichever is lower.

You may have a reduced Annual Allowance if your earnings exceed certain thresholds, or you have already flexibly accessed your pension. Alternatively, your Annual Allowance might be higher for the current tax year if you have unused allowances that you can carry forward from previous tax years.

The amount of relief you can claim depends on your Income Tax band, as shown in the table below.

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The basic rate of 20% will automatically be applied to pension contributions. If you are a higher- or additional-rate taxpayer, you’ll usually be able to claim an extra 20% or 25% respectively, via your self-assessment tax return.

Additionally, any payments you and your employer make will be invested. As such, the value of your pension could go up or down, depending on how the investments perform.

What your retirement income might look like

You must normally be at least 55 (57 from 2028) before you can start taking money from your DC pension. You are then in charge of making withdrawals from your pot, depending on how much is in there. The value of your fund will depend on:

• How well your investments have performed
• What charges your pension provider may apply
• How much you, your employer, and any third parties have paid into your pension pot
• How you decide to withdraw from your pension – a lump sum, smaller payments, or regular payments.

You can usually take up to 25% of the amount built up in your DC pension as a tax-free lump sum. The most you can take is capped by the Lump Sum Allowance (LSA), which is £268,275 for the 2024/25 tax year – your LSA may be higher if you hold a protected allowance.

Any withdrawals you make that exceed the LSA will be subject to Income Tax at your marginal rate.

Defined benefit pensions – The amount you’re paid is based on your salary and length of service

Defined benefit (DB) pensions are typically workplace schemes offered by large or public sector employers. While DB pensions are still available in the UK, they are increasingly uncommon.

According to The Pensions Regulator, (11 December 2024) there were just 5,190 DB schemes in the UK in 2024, compared to 7,300 in 2012.

Who contributes to your defined benefit pension

If you have a DB pension, your employer is primarily responsible for paying into the scheme on your behalf, although you may also be required to make contributions.

Your employer must ensure there are sufficient funds to pay your pension when you retire.

How your defined benefit pension pot could grow

You can benefit from tax relief on contributions to your DB pension up to your Annual Allowance, just as you can with a DC scheme.

However, the way your pension savings are measured against the Annual Allowance differs in the following way:

• For DC pensions, it’s based on the total contributions made.
• For DB pensions, it’s based on the increase in value of your pension benefits.

Also, while your provider is likely to invest your DB pension funds in a variety of assets, the amount you’re paid is not dependent on investment performance (more on this below).

What your retirement income might look like

As with DC pensions, you can usually start withdrawing funds from your DB pension at 55 (rising to 57 in 2028), although some schemes may require you to be 60 or older before you can access your funds. The same LSA applies to the first 25% tax-free element.

However, the amount you’re paid will be based on the pension scheme rules, not on investment performance or the total contributions made.

DB pensions are attractive to many people because they provide a secure, guaranteed income for life after retirement, no matter how long you live. Additionally, some DB schemes include a guaranteed annuity rate, which is the minimum rate at which you could convert your pension savings into an income. As most guaranteed annuity rates exceed current market annuity rates, you could benefit from a higher retirement income.

What’s more, many DB pension providers increase payments annually to ensure they keep pace with inflation.

Typically, two key factors determine the income you could receive from your DB pension:

1. Your salary.
2. How long you worked for your employer

.

Your pension income will be calculated based on either your “final salary” or your “career average” salary, depending on which of these two types of DB schemes you belong to.

In both cases, your employer bears the investment risk and must ensure there is enough money to pay your pension, even if investments underperform.

Collective defined contribution pensions – Pooling funds could generate higher returns, but your income may fluctuate

This is one of the newest types of pensions in the UK, which was introduced under the Pension Schemes Act 2021.

If you belong to a collective defined contribution (CDC) pension – otherwise known as a “collective money purchase scheme” – your money is invested together with contributions from your employer and fellow scheme members.

Put simply, CDCs are a hybrid scheme comprising elements of both DC and DB pensions.

How contributions are paid

You and your employer will both usually pay a fixed percentage of your pensionable salary into the scheme each month.

Unlike with a traditional DC pension, there are no legal minimum contribution amounts; these are typically set by the employer.

Contributions from all scheme members are pooled into a single fund and invested collectively. The idea is that this could spread the risk and allow the fund to grow at a higher rate than if each individual’s pot was managed separately.

How your collective defined contribution pension pot could grow

CDC schemes are typically run by trustees who are responsible for deciding how everyone’s money is invested. They will hire professional investment managers to ensure that there is enough money to pay everyone their pension income.

As with DC and DB pensions, contributions to your CDC pension will also benefit from tax relief.

What your retirement income might look like

Like typical DC and DB pensions, you can usually access at the normal minimum pension age of 55 (57 from 2028). However, your CDC scheme may stipulate a different minimum age.

While CDC schemes pay out a regular income, there is no guaranteed amount. Instead, a target pension income is calculated based on the collective fund. However, your actual income could fluctuate in line with investment performance.

Get in touch

Engaging with your pension as early as possible could help you to build the savings you need for your desired retirement.

If you’re unsure which type of pension is right for you and you’d like help reviewing your existing schemes, I’d love to hear from you.

To find out more, please get in touch by email at lottie@truefinancialdesign.co.uk or call 03300889138.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.  

Workplace pensions are regulated by The Pension Regulator.

FP33410 – APPROVED BY 2PLAN WEALTH MANAGEMENT 21.03.2025 UNTIL 21.03.2026