There are different types of pension schemes and arrangements that you can belong to. Find out about the relationship between pension arrangements and schemes and how this affects the way you can take your pension pot and the way it's taxed.
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There are lots of different types of pension schemes but the most common types are:
Each pension scheme is made up of individual pension pots for each member - called pension arrangements. It's important that you know what type of pension arrangement(s) you belong to because it affects how:
When you joined your pension scheme you should have been given information telling you what type of benefits the scheme provides. Your pension scheme administrator can give you this information.
You can be in any number of arrangements in the same scheme. An arrangement can only pay you one type of benefit, so if you're getting more than one type of benefit you must have more than one arrangement in the scheme.
There are four different types of pension arrangements:
These are also called 'defined contribution' arrangements. With a money purchase arrangement you won't know in advance how much pension you'll get when you retire. You build up a pension pot that you use to provide you with your pension.
The value of your pot will depend on how much money you contribute and how well the funds are invested. This means the value of your pension will depend on how much pension your pension pot can 'buy'.
Any type of pension scheme (occupational or personal pension) can have money purchase arrangements. The following types of pension schemes are normally money purchase arrangements:
With this arrangement the amount of pension you'll get when you retire doesn't depend on the size of your pension pot. Under this arrangement you're promised a certain amount of pension at retirement. The amount of your pension is usually based on your pay and length of service. Usually you can work out in advance how much pension you'll get when you retire.
Defined benefits arrangements are normally only found under occupational pension schemes. Examples of a defined benefits arrangement are:
These are less common than money purchase or defined benefit arrangements. You'll be promised a pension pot of a guaranteed amount when you retire. The amount of pension you'll get will depend on how much your promised pension pot can buy when you start to take your pension.
For example, if you've been promised that your pension savings will be £20,000 for each year of employment, your promised pension savings will be £100,000 after five years.
In a hybrid arrangement you won't know before you take your pension which type of benefit you'll get.
For example, you and your employer pay money into a pension scheme and the money is invested. You're promised a pension of at least £15,000 a year. However if your pension pot can give a bigger pension than that, the bigger pension will be paid to you. So the pension promised to you is either:
A pension arrangement can only pay out one type of benefit. It's possible to get more than one type of benefit from the same scheme. For example if you have benefits promised on a final salary (defined benefits) basis, but you've also paid additional voluntary contributions (AVCs) to build up extra benefits under a money purchase basis. Here you would be a member of a defined benefit arrangement and a member of a money purchase arrangement under the same scheme.
There are many different types of pension scheme that you can join to save for retirement. Information on the most common types is given below.
These schemes are also called company pension schemes. It's a scheme set up by an employer to provide pension or death benefits for its employees. An occupational pension can provide pension benefits on a money purchase, defined benefits, cash balance or hybrid arrangement basis. The two most common arrangements for occupational schemes are:
If you leave your job you'll normally have to stop building up pension savings in your employer's scheme.
Your employer doesn't have to let you join their scheme. However from October 2012 employers will have to start enrolling their employees into a workplace pension.
A personal pension scheme is set up and run by a regulated financial organisation such as a bank or insurance company. You can pay regular or lump sum contributions to the scheme, who will invest it on your behalf.
Anyone can start paying into a personal pension scheme - you don't have to be in employment. If you're an employee your employer may pay into your personal pension scheme - but they don't have to.
Personal pensions are money purchase arrangements so the amount of pension you'll get depends on:
Your personal pension scheme provider should send you a statement each year telling you how much your pension pot is worth.
Stakeholder pensions are really a type of personal pension. The only difference is they have to meet a number of standards which include:
These work in the same way as personal pension schemes. They're mainly aimed at the self employed and could only be taken out before July 1988.
There are other types of pension scheme that come under the occupational or personal pensions umbrella and the most common are: