Types of pension

What pension schemes companies offer will differ and what employees will receive when they retire will vary widely. Broadly they can be broken down into defined benefit or defined contribution schemes.

Defined benefit

Defined benefit pension schemes provide retirement benefits that are based on your earnings and the length of time that you have been a member of the scheme. These give you a guaranteed annual income but are not generally offered to new employees and are becoming a thing of the past.

Defined contribution

Most common these days are defined contribution pension schemes, where contributions made by you and/ or your employer are invested in a range of different investments. You may be offered a choice about how your contributions are invested. The benefits that you receive at retirement depend on:

• How much has been paid in on your behalf (by you and/ or your employer)
• The length of time that it has been invested
• How the investments have performed over this period.

Over the years, it is not uncommon to find that you acquire a number of pension pots if you move employer.

You can look to combine your pensions into one pot, which can reduce the fees you would otherwise pay. It is worth checking that you will not lose benefits if you move a pension or incur transfer fees.

Click here to read more about what The Pension Advisory Service suggests you review.

You do not have to rely on an employer pension scheme and can set up your own personal pension plan.

Traditional pension companies employ a fund manager who will decide where to invest. Each year, a statement is issued to show you how your pension is performing.

Private pensions are a valuable part of the mix when planning for retirement. They have attractive tax benefits which can significantly boost the sum you invest.

A SIPP is a form of personal pension. It enjoys the same tax allowances and is portable as it is attached to you, not your employer. The key difference is that you act as your own fund manager, making decisions about what investments to buy and sell. They also offer a wider range of investment options, also known as asset classes.