What types of pensions are there?

There are three basic types of pension; the State Pension, a defined benefit (DB) pension or a defined contribution (DC) pension.

The basic State Pension is provided by the government and will provide you with a basic income for the rest of your life once you reach State Pension age. You build up your State Pension entitlement by making National Insurance contributions.

A defined benefit pension scheme pays an amount at retirement based on your earnings and how long you’ve been a member of the scheme. These pensions can also be known as a final salary scheme. Some of these schemes base the amount you receive on a career average salary whereas others may use the salary you were on immediately before retirement.

A defined contribution scheme is more like a savings plan. This type of pension builds up a pension pot to pay you a retirement income based on contributions from you and/or your employer. Your pot is put into various types of investments, including shares (shares are a stake in a company). The amount in your pension pot when you come to access it is based on how much has been paid in and how well the investments have performed. You may also hear these referred to as money purchase schemes.

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