What Types of Pension Funds are Available in the UK?

Here’s a sad truth: many elderly Brits are living in abject poverty. According to research, approximately 24% of London’s older adults live in deplorable conditions. And that’s in one city alone. A plethora of factors has caused this unfortunate predicament, including limited income and rising costs of living.

The good news is that you can use pension funds to maintain a good living standard and avoid the murky waters of poverty in your golden years. You fund a pension fund with regular contributions from your earnings during your younger years and increase your odds of leading a good life when you retire. Let’s explore some pension types UK citizens can benefit from today.

UK State Pension

Let’s kick off with the state pension meaning UK. A state pension is a payment that the UK government gives to people who have reached the state pension age. It’s awarded every 4 weeks to the recipient’s account of choice. The UK government often makes the first payment approximately 5 weeks after an eligible citizen has reached state pension age.

Please note that there are 2 primary state pension categories: new and basic. The new state pension is for men or women who were born on or after 1951 and 1953, respectively. Its full rate is £221.20 a week. On the other hand, the basic state pension full rate is £169.50 per week. The latter is for men and women born before 1951 and 1953, respectively. Check the mandates on the GOV.UK website for more info.

With that in mind, to receive the UK state pension, you must meet the following eligibility requirements:

Workplace Pension Schemes

Your employer can help you save for retirement through a workplace pension scheme. Other monikers that refer to the same concept include ‘company,’ ‘work-based,’ ‘works,’ and ‘occupational’ pensions. To enjoy a workplace pension, a predetermined percentage of your earnings must go to a relevant pension scheme every payday. While that is happening, your employer can top up your contributions, and you may get tax relief from the government.

Brits have access to two types of workplace pension schemes:

Personal Pension Plans

Where personal pension plans are involved, you make the arrangements yourself. That means you must set up and manage the plan rather than wait for the government or your employer to do it. In other words, anyone interested in a personal pension plan must be willing to choose their preferred service provider, take full control of the contributions, and pick investment options.

Personal pension plans are also known as money purchase or defined contribution pensions. Please note that some employers include personal pensions in their workplace pension offers. Since the cash you put in a personal pension plan is invested in assets like shares, the payout you’ll ultimately receive will depend on the size of your contributions and how your chosen investment products have performed.

There are two popular categories of personal pension plans:

• Self-invested personal pensions: An SIPP gives you the opportunity to decide where and how your retirement nest egg is invested. If you need an investment vehicle that gives you full control over your retirement money, this is it.
• Stakeholder pensions: Stakeholder pensions are offered by insurance companies, building societies, and banks. Some trade unions also provide them. These types of pensions often come with low minimum contributions, default investment strategies, and capped charges.

Group Personal Pensions

As the name suggests, a group personal pension involves a group of people who make contributions to a specific scheme. These pensions are often arranged for a group of employees who share the same employer. Please note that a group personal pension is essentially a series of individual personal pensions. It’s not a common fund. Each member of a GPP can take their pension fund with them as soon as they leave employment.

A GPP scheme is run by a service provider of your employer’s choosing. However, the pension itself is a contract between the provider and yourself; your employer isn’t involved. That said, besides the amount you put into a group personal pension, your employer can also top up your contributions.

Pension providers invest group personal pensions in assets like stocks and shares. They do that, hoping the funds will grow and earn returns before scheme members retire. That said, the amount you get from a GPP depends on how the involved investment products perform.

Master Trusts

A master trust is a pension scheme used by two or more employers that aren’t connected. Employers often use master trusts to pool collective investments in different employee benefit plans. The assets of a specific master trust are overseen by a seasoned portfolio manager. Since master funds often involve multiple investors and feeder funds, their accounting and reporting functions are usually very complicated.

Different types of master funds are available today, including:

• Commercial master trusts: These are the most common master trusts in the UK. They are preferred by small and medium-sized businesses that prefer auto-enrolment and want to avoid the complications that come with running their own pension schemes.
• Industry-specific master trusts: These master trusts are common with particular sectors, like construction and hospitality. They offer investment options and benefits uniquely tailored to match the preferences of a specific industry’s employees.
• Single-employer master trusts: These master trusts are less common than their counterparts. They are often the go-to for large corporations with multiple subsidiaries or divisions. Such businesses can choose to set up a master trust and centralize pension management.

Other Pension Types

Besides the pension schemes we’ve reviewed, Brits have access to other options, including:

1. NHS pension scheme

This is Europe’s largest centrally administered scheme. It boasts 3.4 million+ members in Wales and England. If you are an NHS employee, you can voluntarily make contributions to the NHS pension scheme. You will receive a broad range of benefits, from tax relief to ill-health and survivor payouts.

2. Teachers’ pension scheme

As the name suggests, a teachers’ pension scheme is exclusively for teachers. If you’re in this occupation and are aged between 16-75, you can save for your golden years with help from the government and your employer.

3. Armed Forces pension scheme

If you are a member of the armed forces, you should be enrolled in the armed forces pension scheme. The enrollment process is automatic and applies to all members of the armed forces. The best thing about this scheme is it doesn’t require contributions from members; the funds come from the public purse.

4. Local government pension scheme

This is a public service pension scheme primarily for local government workers. However, other employers can participate in the scheme. Parliament approves its rules, and the scheme is administered through local pension funds. For the LGPS’s rules to change, Parliament has to give its approval.

5. Public sector pensions

As you may have already surmised, public sector pension schemes are for individuals working in the government, teaching, civil service, and similar professions. These schemes are usually set up by employers and deduct contributions from employees’ contributions.

Conclusion

We’ve guided you through the types of pension schemes in UK. It’s now up to you to pick the best option and save for your future. However, before making the final decision, conduct independent research into how different types of pension schemes work and their perks. Also, familiarize yourself with each product’s shortcomings before committing. You can learn most aspects by simply typing “how does pension work UK” into your search engine and perusing materials from reputable sites like GOV.UK.