Self-invested personal pensions
A self-invested personal pension (SIPP) is a pension “wrapper” that holds investments until you retire and start drawing retirement income.
It is a type of personal pension and works in a similar way to a standard personal pension. The main difference with a SIPP is that you have more flexibility when choosing investments.
Most SIPPs are offered on investment platforms that have a large range of funds offered at a very low price.
Stakeholder pensions must meet minimum standards set by the government. These include:
- Limited charges
- Low minimum contributions
- Flexible contributions
- Penalty-free transfers
- A default investment fund – your money will be invested into this if you don’t want to choose a specific investment
Defined contribution employer schemes
A defined contribution pension allows you to build up a pot of money that you can use to provide retirement income. Unlike defined benefit schemes, which promise a specific income, the income you might get from a defined contribution scheme depends on several factors, including the amount you pay in and the fund’s investment performance.
The defined contribution pension pot is built up from your and your employer's contributions plus investment returns and tax relief.
If you’re a member of the scheme through your workplace, your employer usually deducts your contributions from your salary before it is taxed. If you’ve set the scheme up for yourself, you need to arrange the contributions and apply for higher-rate tax relief through your tax return.
Defined benefit employer schemes
Some employers offer this scheme, also known as a salary-related or a final salary pension scheme. When you retire, it will pay you a pension where the benefit is based on rules set out by the scheme.
Defined benefit schemes usually provide a pension income based on:
- Pensionable service: The number of years you’ve been a member of the scheme.
- Pensionable earnings: This could be your salary at retirement (known as “final salary”) or salary averaged over a career (“career average”) or some other formula.
- Accrual rate: The proportion of those earnings you receive as a pension for each year of membership. Some commonly used rates are 1/60 or 1/80 of your pensionable earnings for each year of pensionable service.
These schemes are run by trustees who look after the interests of the scheme’s members. Your employer contributes to the scheme and is responsible for ensuring there is enough money your retirement to pay your pension.