How do UK pensions work?

Paying into a pension plan is one of the most common ways people save for their retirement years, putting aside money throughout their working lives as a long-term investment for when they no longer have a regular income and may need it most. Saving into a pension can be preferable to other types of savings due to the tax benefits involved, with many UK pensions offering tax relief to help your nest egg grow at a faster rate.

There are different types of pensions available, which all operate and pay out differently. The three main classifications of pensions are occupational defined benefit schemes, which are based on salary, occupational defined contribution schemes and personal pensions, which also include stakeholder pensions. These latter types of pension can be the most financially rewarding if you prefer to take greater control over your finances.

Many employers in the UK offer pension schemes as part of their employee benefit packages, and it can be well worth investigating whether this is the case before beginning a new job – as well as comparing how the company’s pension scheme compares to others. Company pensions can prove especially rewarding if your employer promises to match contributions, essentially helping your retirement funds to grow at twice the rate. From October 2012, all British employers will be required to offer and contribute to pension schemes.

If you are unemployed, self-employed or prefer not to take out a company pension however, there are various alternatives you can investigate, including UK pensions you begin yourself. Consulting a financial adviser can help you understand these options and find the one that’s best suited to you, or you can speak to organisations such as the Pensions Advisory Service.

If you do choose a personal pension, your provider will invest the money you pay in the form of contributions. You have some degree of control over the type of investments made, and can choose whether to go down the route of higher risk investments – such as mutual funds and shares – that could prove more financially rewarding. Other investors prefer the financial security of more stable investments, offering them a guaranteed rate of return over time.

You won’t be alone when paying into personal pensions either, as you may be entitled to receive contributions from the Inland Revenue. Your family members and other people can also pay into your personal pension to help it grow.