Most new workplace pensions nowadays are set up as defined contributions schemes. This means that the contributions paid in are known (defined), unlike defined benefits, where the benefits are known in terms of years of service and salary. In both types of pension, the value of the pension or scheme is driven by the combination of contributions, the fund performance and deduction of charges to your personal pension “pot”.
Previously, many schemes, especially in the public services sector, were set up as defined benefits arrangements. This paid a pension at retirement age based on your salary and how long you had worked for your employer. With these defined benefit schemes, longer life expectancy and the mounting cost to employers of funding the guaranteed benefits, made these arrangements relatively harder and more expensive to fund, so they have largely stopped being offered by most employers in the private sector.
We are going to focus on personal pensions, i.e. pensions you would set up yourself, not through your business but in a private capacity. There are three main types of personal pensions, the differences relate to scheme flexibility, personal control over the investments and cost.
