A pension is a tax-efficient way to save for retirement and give you a source of income in the future. There are different types of UK pension schemes, and each works differently. Examples include state pension schemes and private pension plans. The former provide limited financial support while private pension schemes allow you to build a larger fund for retirement. Read on to learn more about the different types of pensions.

Workplace pension

Otherwise known as occupational pensions these are set up by employers to provide retirement benefits. It allows employees to accumulate a pension fund using contributions based on a salary percentage. The employer is required to match your contributions.

Self-invested personal pension

This is a personal pension plan that allows you the freedom to control and manage your investment decisions. You can purchase a variety of assets including stocks and shares.

Additional voluntary contribution

Members of occupational pension schemes can make payments above the usual level of contributions. These are known as additional voluntary contributions and provide additional pension benefits.

Personal/private pension

This pension is arranged by you and usually attracts a tax relief (up to annual limits). Up to 25% of your retirement qualifies as a tax-free cash lump sum when you retire. The remainder of the pension can be invested to produce an income directly from the fund or used to purchase an annuity. You can also withdraw the entire fund. In this case, it is considered a taxable lump sum.

Stakeholder pension

This works like personal pension, with the main distinction being that you adhere to government rules on annual management charges and terms. This ensures value for money, security and flexibility. Contributions can start as low as £20, and be paid at regular intervals. You can switch to a different pension provider and stop, restart or change contributions without penalty fees.

Money purchase pension plan

In this pension plan, the benefits are directly linked to one’s salary. Regular contributions are made by you and your employer into the pension pot. The total lump sum can be used to take an income in retirement.

State pension

This pension is provided by the government when you reach the State Pension Age. One has to claim the state pension to get it. You can only get this pension if you’ve been contributing to national insurance for at least 30 years. The most you can get is £164.35 per week.

The state pension triple lock is a guarantee that the state pension will increase annually by UK inflation, wage growth or 2.5%, depending on which is higher. It was introduced by the Conservative and Liberal Democratic Coalition with an aim to protect pensioners from inflation. It allows retirees to purchase the same amount of goods with their state pension income, even when inflation rises.

While it offers protection from the effects of inflation, Brits shouldn’t rely on the triple lock pension for comfortable retirement. They should build up a pension pot that supplements their state pension.

Like any other type of investment, pensions are risk-based products. The value of contributions and income generated can rise or fall. That said, you need to seek financial advice before deciding on the best retirement options.