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Different types of pensions

With so many pension options to choose from, it can be difficult to know which is right for you. In this guide, we’ll explain some of the different types of pensions and how they can work for you.

Types of pensions

There are a number of different pension types to choose from. The choice you make will depend on your situation, such as your state of employment, and your needs, like your investment requirements.

Generally, pensions fall into one of two categories: personal pensions and workplace pensions.

You can choose to open your own personal pension and make your own contributions. There are several types of personal pensions, such as stakeholder pensions and self-invested personal pensions (SIPPs).

If you are working, your employer must offer a workplace pension which takes monthly contributions from both you and your employer. From April 2019, the minimum workplace pension contribution was set legally at 8%, at least 3% of which must come from your employer. 

All pensions benefit from tax relief, where a portion of your contributions and overall pension pot is tax-free. 

What is a State Pension?

The State Pension is a pension paid to you from the government when you reach state retirement age. To be eligible for a full basic State Pension you must have 30 qualifying years of National Insurance credits or contributions.

The official website is home to all the information you need about State Pensions, including when you are eligible to claim yours.

What is a personal pension?

A personal pension is a specific savings account you can set up to help you financially prepare for retirement. They are often referred to as ‘defined contribution’ or ‘money-purchase’ schemes. A defined contribution pension is based on how much you have contributed to, as well as the growth of, your pension.

The money you contribute to your pension will be invested in a range of assets, organised by a fund manager. These can be:

  • Cash
  • Bonds
  • Stocks and shares
  • Property

A personal pension is a popular option for people who may not have access to a workplace pension, such as if you are self-employed or if you are not currently in work but want to begin saving. People other than yourself may contribute to your defined contribution pension, such as your employer or your partner. Parents may also want to contribute to their child’s pension.

You can access the funds in your personal pension once you are 55, increasing to 57 in 2028, however this may vary depending on your pension provider. 

Defined contribution pensions offer several options when it comes to withdrawing your money. You can:

  • Cash in the whole amount
  • Combine your pension pots (this can be done at any point, not just on withdrawal)
  • Take a lump sum
  • Invest in a pension annuity
  • Take a flexible income via drawdown
  • Keep your money invested in the pension and take it out when you need it

Subject to the terms and conditions of your individual pension, you could choose to combine one or more of these options.

Personal pensions are also subject to tax relief, which means you’ll receive a certain portion of your pension tax-free.

Typically, 25% of your pension is tax-free and the rest will be subject to standard Income Tax. 

Workplace pensions

Workplace pensions are those offered by your employer. It is a legal requirement that your employer offers a pension. They are subject to tax relief, so you can access a portion of your workplace pension tax-free.

There are two different types of tax relief available for workplace pensions. A ‘net pay’ arrangement means your contribution is taken before tax is deducted. A ‘relief at source’ arrangement means Income Tax and National Insurance will be deducted before your pension contribution is calculated.  

Your pension scheme provider will claim the tax back from the Government at the basic rate of 20%, which is then added to your pension.

You will still be able to access your pensions from all your previous employers once you retire, but you may not qualify for all the benefits if you have switched pension providers. 

The two main types of workplace pensions are:

  • Defined benefit
  • Defined contribution
Defined contribution

Employees are automatically enrolled in the scheme, providing their employment status meets the qualifying criteria. You will make regular, automatic contributions to your pension that will typically come out of your wage. Your employer will then match your contribution, or a percentage of it.

These pensions currently benefit from 20% tax relief. This may differ for higher earners, who will need to contact HMRC to find out their tax relief based on their salary and contributions.

Defined benefit scheme

A defined benefit plan is a pension scheme where your employer agrees to pay you a set amount of money when you retire. The amount will be based on your length of time with the company, your salary history and your age.

This differs from a defined contribution pension plan, which takes regular contributions from you, your employer, or both. These schemes are largely historic now and only used by a handful of employers (usually public sector).

We hope you found this guide useful. If you have any questions or would like to find out more, get in touch with a Newcastle Financial Adviser. Alternatively, visit your nearest Newcastle Building Society branch.

Newcastle Building Society introduces to Newcastle Financial Advisers Limited for advice on Investments, Pensions, Life and Protection Insurance and Inheritance Tax Planning.

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Newcastle Building Society introduces to Newcastle Financial Advisers Limited for advice on investments, pensions, life and protection insurance, and inheritance tax planning. Aspects of inheritance tax planning are not regulated by the Prudential Regulation Authority nor the Financial Conduct Authority. Newcastle Financial Advisers is a trade name of Newcastle Financial Advisers Limited which is an appointed representative of The Openwork Partnership a trading style of Openwork Limited which is authorised and regulated by the Financial Conduct Authority.