What Type of Pension Do I Have?

Why does the type of pension matter?

Because two statements could both say:

"Pension value: £100,000"

and mean completely different things.

One might represent an invested pension pot.

Another figure might be associated with benefits under a defined benefit scheme and shouldn't simply be treated as though you've got £100,000 sitting in an investment account waiting to be withdrawn.

Before asking:

"Is my pension performing well?"

or:

"Should I transfer it?"

we need to understand what we're actually dealing with.

Steve's observation

Don't make a £100,000 decision based on understanding £10 worth of paperwork.

People sometimes spend more time comparing mobile-phone contracts than understanding pensions they've spent 20 or 30 years building.

You don't need to become an expert.

But knowing what type of pension you've got is fairly important.

The first big distinction: Defined Contribution or Defined Benefit?

These are the two main types of private pension you're likely to encounter.

Defined Contribution — DC

You might also see this called a:

money purchase pension.

With a defined contribution pension, money is paid into a pension arrangement and invested.

You therefore normally build a pension pot.

The eventual value depends on factors including:

• how much has been contributed;
• how investments perform;
• charges;
• and how and when benefits are taken.

The investment value can rise and fall.

Defined contribution arrangements can include both:

workplace pensions

and:

personal pensions.

So:

workplace pension does not automatically mean defined benefit.

And:

personal pension does not mean the same thing as workplace pension.

They're different ways of describing pensions.

Defined Benefit — DB

Defined benefit pensions work differently.

Rather than simply accumulating an individual investment pot that determines your retirement income, the scheme rules promise a particular level of benefits.

Two common descriptions are:

final salary pension

and:

career average pension.

The calculation can involve things such as:

• pensionable salary or earnings;
• length of pensionable service;
• the scheme's accrual rate;
• and other scheme rules.

This means the key question isn't simply:

"What's my pension pot worth?"

because the central value of the arrangement is normally the promised retirement benefit.

Defined benefit pensions can also contain important features such as inflation-linked increases and benefits for a spouse, civil partner or other dependant, depending on the scheme.

Those benefits can be extremely valuable.

Is a final salary pension the same as a defined benefit pension?

A final salary pension is a type of defined benefit pension.

The term comes from the way benefits are calculated under the scheme rules, historically using salary at or around the end of employment or scheme membership.

Another common form is a:

Career Average Revalued Earnings pension — CARE.

Rather than using final salary, career-average schemes broadly build benefits using earnings during membership according to the scheme's particular rules.

Both are defined benefit arrangements.

So if your paperwork says:

• Final Salary
• Career Average
• CARE
• or: Defined Benefit

that's an important clue.

Do not assume it's simply another pension pot.

What is a workplace pension?

A workplace pension is simply a pension connected with your employment.

But that still doesn't tell us exactly what type it is.

A workplace pension might be:

Defined Contribution

or:

Defined Benefit.

And some employers use arrangements such as group personal pensions, where the pension is provided through a pension provider even though you joined it through work.

HMRC describes group personal pensions as personal pension arrangements that can be established by employers to give employees access to a pension plan run by a pension provider.

So even the sentence:

"My employer set it up"

doesn't necessarily tell us everything.

We've already covered workplace arrangements properly in:

What Type of Workplace Pension Do I Have?

If the pension you're trying to identify came through an employer, that's a sensible guide to read alongside this one.

What is a personal pension?

A personal pension is normally a pension arrangement established between you and a pension provider.

Personal pensions are defined contribution arrangements.

That means you're normally building an invested pension pot rather than receiving a defined-benefit promise.

You might have started one:

• yourself;
• through a financial adviser;
• when you were self-employed;
• to save alongside a workplace pension;
• or many years ago under a previous financial arrangement.

If you're unsure how personal pensions work, start with:

What Is a Personal Pension and How Does It Work?

What is a stakeholder pension?

A stakeholder pension is a type of personal pension.

They were designed with particular requirements around areas including charges, contributions and transfers.

You may well encounter one if you have pensions established some years ago.

The important point for this guide is:

Stakeholder pension = personal pension = defined contribution.

That doesn't automatically mean it's good, bad, cheap, expensive or suitable to transfer.

It simply helps us identify what we're looking at.

What is a SIPP?

SIPP stands for:

Self-Invested Personal Pension.

A SIPP is also a type of defined contribution personal pension.

The distinguishing feature is generally greater control and choice over the investments available within the pension.

Depending on the provider, that can include a much wider investment range than a conventional personal pension.

Again:

SIPP does not mean a completely different tax universe.

It is still a pension.

The important differences generally relate to things such as:

• investment choice;
• control;
• administration;
• features;
• and charges.

We'll deal with SIPPs properly in:

What Is a SIPP and How Does It Work?

For now, if your statement says SIPP, you've identified an important part of the answer.

And then there's the State Pension

The State Pension sits separately from the private pensions we're discussing.

It isn't an investment pot sitting with a pension provider.

Your entitlement depends on your National Insurance record and the State Pension rules applying to you.

So when we're creating a complete retirement picture, we need to identify:

private pensions

and:

your State Pension entitlement.

We've already covered this in:

How Much State Pension Will I Get?

How can I actually work out which pension I've got?

Get the paperwork.

Or log into the provider's website or app.

Then start looking for particular words.

Words suggesting Defined Contribution

Look for things such as:

• Defined Contribution
• DC
• Money Purchase
• Personal Pension
• Stakeholder Pension
• SIPP
• Pension Pot
• Fund Value
• Investment Funds

These are strong indicators that you're dealing with an invested pension pot.

Words suggesting Defined Benefit

Look for:

• Defined Benefit
• DB
• Final Salary
• Career Average
• CARE
• Pensionable Service
• Accrual Rate
• Deferred Pension
• Annual Pension

These suggest that you're dealing with promised scheme benefits rather than simply an individual investment pot.

But don't rely on one phrase if you're uncertain.

Ask the scheme administrator or provider to confirm exactly what type of benefits you hold.

Build yourself a pension inventory

If you have several pensions, don't try to remember all of this in your head.

Create a simple list.

For every pension, write down:

• Provider / scheme
• Where it came from
• Approximate start date
• Workplace or personal
• Defined contribution or defined benefit
• Current pot value or promised benefit
• Normal retirement age
• Any guarantees or protected benefits mentioned
• Current contributions

That immediately turns:

"I've got pensions all over the place."

into something we can actually work with.

Why shouldn't I just combine everything?

Because you still don't know enough.

Even once we've identified a pension as defined contribution, there may be features worth checking before moving it.

These can potentially include:

• guarantees;
• protected pension ages;
• protected tax-free cash;
• valuable investment arrangements;
• charging structures;
• exit terms;
• or other scheme-specific benefits.

And if you're dealing with a defined benefit pension, the consequences of transferring can be much more significant because you may be giving up safeguarded retirement benefits.

That's why Foundation 3 follows this order:

Identify → Understand → Evaluate → Then consider whether anything should change.

Not:

Find pension → immediately transfer it because an app looks nicer.

What if I can't find the pension paperwork?

That's common.

If it came from an old employer, our completed guide:

How Do I Find an Old or Lost Workplace Pension?

takes you through that process.

We'll also build the broader whole-pension exercise in:

How Do I Find All My Pensions?

The objective isn't simply to find one missing pot.

It's to establish your entire pension position.

Does an old pension automatically mean a bad pension?

Absolutely not.

Age alone tells us very little.

An older pension might have:

• higher charges;
• limited investment options;
• outdated administration;

but it could also contain:

• valuable guarantees;
• protected benefits;
• or features that would be difficult or impossible to replace.

Steve's observation

Old doesn't mean bad. New doesn't mean better.

The correct question is:

"What have I got, what does it cost, what does it do, and what would I lose if I changed it?"

That's a much better starting point than judging a pension by the age of the paperwork.

What Should I Do Next?

Find every pension statement you can.

For each one, answer just three questions:

1. Is it workplace or personal?
2. Is it defined contribution or defined benefit?
3. What benefit or value does the statement currently show?

Don't transfer anything.

Don't combine anything.

Don't start changing investments.

First build the map.

Then we can work out what the map actually means.

The next guide is:

How Do I Understand My Pension Statement?

That's where we'll start translating the paperwork.

One of the biggest mistakes people make with pensions is jumping straight to: "What should I do?" before answering: "What have I got?"

You wouldn't sell a house without knowing roughly what it was worth. You wouldn't trade in a car without knowing what model you'd bought.

Yet people sometimes consider transferring pensions worth hundreds of thousands of pounds without understanding whether they're defined contribution, defined benefit or contain guarantees.

So our starting point is deliberately boring. Identify everything. Because boring can be extremely useful when it's protecting 30 years of retirement savings.

Once we know what you've actually got, we can start asking the much more interesting question: "Is it any good?"

Got pension paperwork everywhere but still don't really know what you've got? Start by identifying every pension before deciding whether anything needs changing. If you'd like help understanding how your pensions fit together and what they could mean for your retirement, speak to Open Door Wealth.