Different Types of Pensions

Did you know… The first ever pension was launched in the UK, January of 1909 known as the Old Age Pension. It consisted of 5 shillings per week or 7 shillings and sixpence for a married couple and was only payable to people with an income below £21 a year.

The first recipients of the Old Age Pension had to be at least 70 years of age, and deemed to be of ‘good character’! The Pensions landscape has changed somewhat since 1909, in this blog post we look at the three main ones.

The State Pension

Despite the State Pension being around for over a hundred years, it took just under forty years until it was available to every man and a further two before it was available to every woman too.

For an individual to receive the State Pension in full then they need to be of State Pension age and have had paid National Insurance contributions for thirty-five qualifying years.

The State Pension is funded by UK taxpayers, through National Insurance contributions automatically deducted from your salary and used to accumulate qualifying years towards your State Pension.

Defined Benefit Pensions

Although very popular in years gone by, Defined Benefit (DB) Pensions are rare these days within the private sector, and many existing schemes have long since been closed to new members. There were several reasons as to why they were a popular choice such as receiving a secure income for life and one that increases each year in line with inflation.

However, for many private sector firms, DB Pensions are simply an ongoing liability, the funding for these pensions would come from the company’s earnings leaving firms with a cavernous black hole on their balance sheet with little prospect of being able to plug it.

Defined Contribution Pensions

Nowadays the most common type of pension available is the Defined Contribution Pension and is used both for workplace pension schemes and for personal pensions. As it’s name suggests, this type of pension relies on your contributions to build up your pot. If you have a workplace pension, then your contributions are deducted from your salary before it is taxed whilst your employer also adds their own. This is typically 3% of your salary but can be altered to contribute more if choose. However, if you have set up a Defined Contribution Pension for yourself, then how much you contribute is entirely down to you. In the past, it was up to you to decide whether you joined your employer's pension scheme. Since 2012, employers have been gradually required to automatically enrol eligible workers into a workplace pension scheme meaning you would have to request to opt-out of such a scheme.

Where do your contributions go before you access them in retirement?

While the exact allocation and investment strategy can vary based on the type of pension scheme and your own preferences, your contributions are typically invested in various financial instruments such as Equities (Stocks), Bonds, Property Mutual Funds, Exchange-Traded Funds and Cash, to help grow the value of the pension fund over time.

It's important to note that the allocation of your pension contributions to these various investments is typically determined by the pension fund's trustees or managers, based on the fund's investment objectives and your chosen risk profile.

The importance of reviewing your pensions

We understand the importance of regularly reviewing your pensions to ensure a secure financial future. One critical aspect is being up to date with your State Pension contributions. Often, individuals who have had periods of working overseas may have gaps in their State Pension history which could impact their retirement income.

Additionally, it is essential to assess whether your Defined Benefit or Defined Contribution pension aligns with your future plans. As your life changes, so too do your aspirations and circumstances making it even more crucial to keep on top of your pension strategy.

At Skybound Wealth, we are here to guide you through the intricacies of pension planning so to ensure your financial goals remain within reach as you move towards a prosperous retirement.