Let’s start at the beginning: what is a pension? Put simply, a pension is a saving plan which helps you put some money away for your later years. This kind of saving scheme is important for helping you plan for a life without work by providing financial security throughout your retirement.

So whether you’re planning on emigrating, paying off your debts or leaving something for your family, a pension can help you achieve the financial security to reach those goals.

You can build your pension pot by saving a little of your regular income throughout your working life. Then, you can access this once you’ve entered into semi or full-time retirement. And when compared with other saving schemes, a pension comes with many financial benefits. These include the option of a tax-free lump sum and the security of receiving a regular income in your golden years.

What are the different types of pension?

If you’re thinking of setting up a pension then there are many different types available to you. Let’s have a look at them so you can understand your options.

Workplace pension

This type of pension scheme is arranged by your employer, and is also known as an ‘occupational pension‘. You add a percentage of your own salary into the scheme and your employer makes contributions on your behalf too. There are two kinds of workplace pensions you can benefit from:

Defined contribution

 This pension is based on how much money has been paid into the pot. Your pension provider invests this money in various financial institutions and the amount available to you at retirement is dependent on the number of funds and their success in those investment markets.

Defined benefit

These are sometimes called ‘final salary pensions.’ This differs from ‘defined contributions’ as the money you receive at retirement isn’t dependent on investments. Instead, it’s based on your retirement salary and the length of time you’ve worked for that employer.

Individual pension

Personal pensions, stakeholder pensions and self-invested personal pensions are all pensions which come under the ‘individual pensions’ umbrella.

It is up to you how often you contribute and what you get back at retirement age is more or less dependent on how well your fund performs in its investments. It’s true that your fund can go up and go down. This means you may get back more than you invested or you may receive less. Furthermore, it’s possible that your company will contribute to your individual pension, too.

State pension

A state pension is a regular payment from your government. To qualify, you must first reach the state pension age and have at least 10 years of National Insurance contributions on your record. Unfortunately, state pensions don’t tend to offer enough to live on but it can be a useful contribution to your overall retirement income.

What is the difference between pension and retirement?

The difference between pension and retirement is all to do with the money you receive when you quit working.  A pension refers to the specific amount of money you’ll regularly receive after you have retired, while retirement can come at any time of your choosing.

For example, you may decide to retire at the grand old age of 40-years-old. But, if you don’t have the money available to sustain yourself over the coming years then you will find yourself coming out of retirement to look for work again.