What is the difference between a state pension and a private or company pension?

State pension, company pension and personal pension have all become part of everyday language. But what exactly is the difference between them?

The quick and easy guide to pension differences

There are many different types of pension on the market and all that technical jargon can make it a bit of a financial jungle at the best of times. Our article explores the three main types of pension scheme to hopefully make all seem a little clearer.  And we are going to do it without the jargon…

The headline facts at a glance

The three main types of pension scheme you can pay into in the UK are the State Pension, a company pension and a personal pension. The state pension is a government benefit which we all pay into in some degree throughout our lives. A company pension is linked to the work we do and a personal pension is a scheme we wholly choose ourselves. Each have their own benefits and features which make them unique. We will talk about each first below and then in our conclusion highlight the main differences.

What is a state pension?

The government introduced the State Pension following the Old-Age Act in 1908 - this is often regarded as the major foundations of the modern welfare State. The aim was to provide a lifetime weekly payment for people in their old age after they had finished work. You do not have to take your pension at retirement age – you can choose to defer it until a later time. To get the benefit  currently you must have paid or been credited with National Insurance contributions (NI) which are usually taken out through your earnings. The amount you receive depends on whether there are any gaps in your NI contributions.  If you have gaps in your contributions when you retire the level of your state pension may be below the national standard level.  You can check whether you do have gaps by clicking here.

As well as contributing through NI towards your state pension while you are at work, you can also put some of your earnings towards a company pension. This is a pension scheme determined by the employer and offered as a benefit to you as an employee.

With the new government initiative of auto-enrolment, all companies will need to provide eligible employees with a pension from 2018, but unlike the state pension you can decide to opt out of this if you wish. You can decide how much you pay into the pension (though there is a minimum percentage of your salary taken out) and it is generally taken out of your earnings automatically alongside your NI payments.

One of two great benefits of a company pension is your employer will also contribute to your fund each month. The other benefit is you can claim tax relief on your contributions.  If you are on basic rate tax, then you will receive 20% tax relief (which goes straight into your pension)* and your employer will claim this back. If you are on a higher rate of tax the rules get a little more complex and you need to claim tax relief back yourself. In which case it is a good idea to visit the government website for further information.

What is a private pension?

If you do not have a pension available through your employer, you may wish to consider paying into a private pension (or personal pension), as a state pension is may not to meet your financial needs when you retire. Again, you will be making regular contributions, but this will be from your personal bank accounts. You can start to access this type of pension from the age of 55. At this point there are many options open to you some of which we detail here.  If the scheme is not performing well you have the option of transferring it to another scheme (pension switch).

Just like a company pension you can claim tax relief on your contributions. Generally, the pension provider will claim back the tax relief at source through the HMRC. If you are a basic rate tax payer you can claim back  20% tax relief on all your contributions. If your tax rate is above this, you will receive the basic 20% direct from HMRC but you will need to claim the extra 20% or above yourself.*

There is more information on the government website.

There are many different pension schemes on the market and each will have its own positives and negatives. The key is in matching your lifestyle, needs and aspirations to the features and benefits of a pension scheme.  A financial adviser can break down the complexity of the pension world, keep your essential needs at the heart of the assessment and help you find the scheme which is most appropriate for you.

Are you looking to review your retirement savings or need more information about personal pensions?

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What's covered:

  • A quick overview of what types of pension you might have
  • The reasons why a transfer could be right for you
  • Industry phrases and what they mean
  • How our approach is different to most, if not all, financial advisers

More information…

Hopefully the information in this guide has given you a clearer idea of the differences between the state pension, a company pension and a personal pension. Below are three of our most frequently asked questions. If you cannot find what you are looking for here please do not hesitate to give us a call.

Why would I have gaps in my NI contributions?

NI Contributions are usually automatically deducted from your earnings. If you are unemployed and you are receiving benefits you will also be credited with NI automatically. You may have gaps in your contributions record if you were unemployed but did not receive benefits, you have been living abroad or you were self-employed but did not make voluntary contributions to your National Insurance to meet the minimum requirement.

What is auto-enrolment?

In an effort to encourage Brits to take out a pension, the government introduced a policy outlining a system in 2012 whereby all UK companies would have to offer all their eligible employees (earning over £10,000) a pension scheme. This is called auto-enrolment. Introducing companies to the new system has been a long process which began with the larger businesses. By 2018 all companies will be registered. Now instead of opting in employees will be offered the option of opting out of the pension.

What does the government consider to be retirement age?

You will receive the state pension when you reach the retirement age set by the government which is currently classed as 65 for men and between 60 and 65 for women depending on when you were born. The government is currently changing the pension age for men and women so they are in line with each other. The women’s pension age has been increasing by degrees since 2010 and by    2018 they will both be 65. To take account of the aging population the pension age for both men and women is also being increased.  By 2020 the pension age will be increased to 66 and it is then expected to increase to 67 between 2026 and 2028.

To see when your state pension age is click here.

Call 0800 304 7600 for a friendly chat about your pension

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Frequently asked questions

Important information

Tax treatment depends on your individual circumstances and may be subject to change

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