What is a pension?

A pension is money you'll use to live on when you retire. Most people get a state pension from the government which typically covers basic needs. But if you have aspirations of travelling, playing more sport, starting a new hobby or other plans in retirement, addiitonal income is likely to be required. 

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Broadly speaking, there are two types of pensions;

1. Defined Benefit (or Final Salary)

2. Defined Contribution (or money purchase)

 

 

Defined Benefit

The pension is linked to your salary while you're working, so it automatically increases as your pay rises. Your pension is based on your pay at retirement and the number of years you have been in the scheme. Your pension entitlement doesn’t depend on the performance of the stock market or other investments.

In most final salary schemes, you pay a set percentage of your wages towards your pension fund and your employer pays the rest. Defined Benefit/Final salary schemes are becoming less common and most employers no longer offer them as the risk, unlike a Defined Contribution scheme, is with the scheme provider. 

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Defined Contribution

The money you pay into the scheme is invested with the aim of giving you an amount of money when you retire. Your pension is based on the amount of money paid in and on how the investments have performed. if a workplace scheme, you'll usually pay a percentage of your wages into the scheme and your employer will also pay a regular amount. 

 

Defined Contribution pensions can also be opened individually, such as for the self-employed or a grandparent for their grandchild.