Private pensions have a number of similarities and differences. This guide will explain the differences between pension types, as well as some similarities. There are two main types of private pension:

• Defined contribution
• Defined benefit

Differences Between Pension Types

Defined Contribution Pensions

Defined contribution pensions (also referred to as money purchase schemes) are a type of personal pension. They can be workplace pensions provided by your employer or private pensions, which you would need to arrange yourself or through a financial advisor.

Money paid into the pension is put into investments (such as stocks and shares) by the chosen pension provider.  The value of your pension pot can therefore go up or down depending on how the investments perform.

These pensions offer a variety of funds to invest in, which represent different levels of risk. Some schemes automatically move you into a low-risk fund as you approach retirement, often described as lifestyle switching.

What you receive from the pension at retirement is not guaranteed.  This depends on how much was paid in, and how well the investments have performed.

Defined Benefit Pensions

Defined benefit pensions are workplace pension provided by employers. They are also known as final salary pensions. 

Unlike defined contribution pensions, how much you receive from your pension at retirement is not dependent on investment performance, or how much you have paid in. Defined benefit pensions are based on your salary and how long you have worked for your employer.

Defined benefit schemes also differ for defined contribution schemes in that the pension provider will guarantee to pay you a certain amount each year when you retire. The amount you receive year on year often increases in line with inflation.

Differences Between Other Pension Types

Self Invested Personal Pensions (SIPPs)

Self-invested personal pensions (SIPPs) are a pension ‘wrapper’ that allow you to save, invest and build up a pot of money for when you retire. It is a type of defined contribution personal pension and works in a similar way. The main difference is that with a SIPP, you have more flexibility with the investments you can choose, which you manage yourself or with the help of a financial adviser.

As you’re in control, you can make changes and additions to your investments as often as you want. SIPPs can offer much wider investment options than other pension types.

Small Self-Administered Schemes (SSAS)

Small self-administered pension schemes (SSAS) are generally set up to allow a small number of senior staff in a company to build up a pot of money. They differ from other occupational pension schemes in that they limit the membership to usually no more than 11 members. These are often company directors or senior executives. However, they can be open to other workers and even family members.

The value of a member’s entitlement from a SSAS when they retire depends on:

•  The amount of money that’s been paid in
•  The length of time that each contribution has been invested
•  investment growth over this period and the level of charges (if applicable).

SSAS pensions function like most other workplace pensions, with a few key differences. Like most defined contribution schemes, the employer and/or its members pay contributions, which are all eligible for tax relief. Members can start withdrawing benefits from the age of 55 in the standard way.

However, unlike other schemes, there’s often no pension provider involved. All the members, or trustees, decide what happens with the monies, thus gaining greater flexibility and control. Another key difference is that you can pass down the benefits of the scheme to future generations.

How we Can Help with Differences Between Pension Types

Here at The Compensation Experts, we work with solicitors who have years of experience with financial mis-selling claims. This means that they can help with any questions you have about the differences between pension types when making a claim. If you think you may have a potential claim, contact us today by filling in or contact form. Or call us to speak to one of our friendly knowledgeable agents.

With an increasing amount of ways to save for retirement or diversify your investment portfolio, pensions can be a confusing topic. Fortunately, by analysing Google search data between 1^st May 2020 and 30^th April 2021, we’ve been able to determine the top pension questions posed by Brits – and answer each!

Are pensions taxable?

With an incredible 5,760 annual Google searches of ‘are pensions taxable?’, Brits are clearly concerned about the tax implications of taking out a pension. Similarly, ‘how are pensions taxed?’ is posed by a further 2,040 people, each and every year. But what’s the reality?

To offer clarity: your pension is treated as earned income, and is subject to income tax. However, it’s important to remember that you’re usually able to withdraw 25% of your pension pot as a tax-free lump sum as soon as you turn 55.

Are pensions worth it?

To answer the 3,840 yearly Google searches of ‘are pensions worth it?’: in short, yes. Paying into a workplace pension is a tax-efficient way of preparing your finances for retirement. Even better, your employer is obliged to top up your pension pot with a contribution of at least 3% of your salary each month.

Can I inherit my husband’s state pension?

One of the most pressing pension concerns in Brits is in relation to spousal payments, with 2,620 typing into Google ‘can I inherit my husband’s state pension?’, and a further 1,080 wondering ‘can pensions be inherited?’. Generally speaking, if your husband, or wife, passes away, you will be eligible to inherit at least some part of their pension plan. However, there are currently some specific criteria:

1. You must have been married before 6 April 2016.
2. Your partner must have reached state pension age before 6 April 2016 OR would have reached state pension age by this date.

If you remarry before you reach state pension age, you will not be eligible to inherit your partner’s pension.

Pensions: can you cash them?

With a resounding 2,040 yearly Google searches for ‘pensions can you cash them?’, and an additional 1,320 for ‘can pensions be cashed in?’, there’s clearly intrigue among Brits around whether it’s possible to make our savings go a little further than our pension plans allows.

To address both queries, you can cash in 25% of your entire pension savings once you reach the age of 55, as a tax-free lump sum. After this, you can continue to withdraw the remaining 75%, but you will have to pay the standard tax rates (as well as any withdrawal charges outlined by your pension provider).

Are private pensions safe?

‘Are private pensions safe?’ is a valid concern, held by 1,680 yearly Google searches, and perhaps many more up and down the country. Fortunately, all personal pension pots are protected by the Pension Protection Fund (PPF), which covers up to 100% of your payments should your employer goes bust.

Pensions: where to start?

The great thing about paying into a workplace pension is that a lot of the work is done for you; to address the 840 annual Google searches of ‘pensions where to start?’, your employer will usually automatically enrol you into a scheme once you earn a salary of over £10,000.

If you’re not automatically enrolled, it’s well worth having a chat with your company to put you on a plan. Not only will you benefit from your own contributions, but also contributions made by your employer. Additionally, while you’ll not cash in your pension until you’re at least 55, it’s advised you start making steady savings as early as possible.

How pensions are divided in divorce

Divorce brings about many financial queries, questions, and concerns, including ‘how pensions are divided in divorce’, which is pondered by 840 Google searchers each year. Firstly, you can make an informal spousal agreement to protect each of your pensions in the event of divorce – this will need to be officially documented to hold any merit, however.

Alternatively, there may be a split. This can either come in the form of a pension transfer, or one of your can offset the value against other assets you share. For instance, you may agree that one of you gets a greater share in the family home in exchange for the other keeping all of their pension.

Finally, if you’re not married at all, no matter how long you’ve been together, you have no legal basis to claim any of your partner’s pension upon separation.

Pensions are clearly high on the agenda of Brits, contemplating their future finances. However, not every plan are a sure thing, with some mis-sold pension schemes or investment opportunities costing savers lifechanging sums. If this sounds a familiar scenario, get in touch for advice around how we can help you claim the compensation you deserve. Or head on over to our blog for even more expert guidance.