What is a workplace pension? 

A workplace pension is a scheme set up by an employer to provide retirement benefits for its employees. A percentage of your pay is put into the pension scheme automatically every payday.

In most cases, your employer also adds money into the scheme for you, and the government adds tax relief.

This means that for every £100 that lands in your pension pot, it might only cost you £50 or £60 from your take-home pay; which can really add up long term.

Read our full guide on pensions tax, relief and allowances.

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The two core types

While there are many different names for pension schemes, almost all of them fall into two main categories based on how the money is calculated. 

What are defined contribution pensions?  

Most modern workplace pensions are Defined Contribution (DC) schemes. You and your employer pay into a ‘pot’. This is invested market into different assets such as shares, bonds and property

The amount you get out at the other end when you retire, depends on how much was paid in and how well the investments within your pot performed. The final amount is not guaranteed.

What are defined benefit pensions? 

These are sometimes called ‘final salary’ or ‘career average’ schemes. They are now a rare find in private sector employment (though you may have one from an older job)  but remain common in the public sector e.g. the NHS. 

Under defined benefit schemes, employers promise to pay you a specific income for life when you retire. The amount is calculated based on a combination of your salary and years of service. The investment risk is held by the employer, not you. 

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How workplace pensions are structured

Behind the scenes, workplace pensions are set up in different legal ways. They are generally split into occupational (trust-based) schemes and group (contract-based) schemes.

Occupational pensions 

In occupational pension schemes, the pension is held in a trust and looked after by a board of trustees who have a legal duty to look after the members’ interests.

What is a company pension scheme? 

Historically, large companies ran their own pension trusts. Today, most modern ‘company pensions’ are actually master trusts (like Nest, The People’s Pension, or NOW: Pensions).

These are large multi-employer trusts that run the pension scheme on behalf of many different businesses.

What is an auto-enrolment pension scheme? 

Auto-enrolment is not a pension product in itself, but the government rules that determine who must be enrolled and what minimum contributions apply.

The pension your employer uses to fulfil this obligation will be one of the scheme types listed above.

Under Automatic Enrolment, employers must enrol eligible staff (aged 22 to State Pension age, earning at least £10,000) into a pension scheme.

These rules ensure there is a minimum contribution of 8% of qualifying earnings — 3% from the employer and 5% from the employee.

What is a SSAS pension? 

A Small Self-Administered Scheme (SSAS) is a niche type of occupational pension, usually set up by the directors of a small business.

A SSAS offers significant flexibility, allowing the pension to loan money to the employer for business costs, or to buy the company’s commercial premises directly in a tax-efficient way.

These schemes are generally a tool for business owners, not employees. 

Group pension schemes 

In these schemes, the employer hires a pension provider, but the contract is legally between you (the employee) and the provider.

What is a standard group pension?  

Also known as a Group Personal Pension (GPP), this is the most common type of private sector pension. The employer chooses a provider (like Aviva, Royal London, or Scottish Widows) to run the scheme. The provider claims tax relief for you and manages the investments. 

What is a group SIPP?  

A group Self-Invested Personal Pension (SIPP) is a GPP with added flexibility. A standard GPP generally offers a limited choice of funds, a group SIPP allows employees to choose their own investments, often including individual shares. 

What is a group stakeholder pension?  

Stakeholder pensions were introduced by the government in 2001 as a simple, low-cost option with capped fees and flexible contributions.

They have largely been replaced by modern GPPs and Auto-enrolment schemes, but some older schemes still exist.

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Other key concepts

What is salary sacrifice? 

Salary sacrifice is a way to structure your pension contributions to save tax. You agree to sacrifice a portion of your salary in exchange for your employer paying the same amount into your pension as their contribution.

Because this technically makes your salary lower, you pay less National Insurance (and so does your employer). You end up with the same amount in your pension, but your take home pay is slightly higher. 

From April 2029, NI relief on salary sacrifice pension contributions will be capped at £2,000 per year. Contributions above this will attract National Insurance for both you and your employer. Income tax relief on contributions is unaffected.

Worth knowing: 

• Salary sacrifice reduces your official contractual salary, which can have knock-on effects in a few areas. Mortgage lenders use your contractual salary when assessing affordability, so a heavily sacrificed salary could affect how much you can borrow.
• Statutory payments such as maternity and paternity pay are also calculated on your reduced salary. If your life insurance or death-in-service cover is linked to your salary, this may be lower too. If any of these apply to you, it's worth weighing up the NI saving against the potential impact before committing.

What are public sector pensions? 

These are the pension schemes for workers in the NHS, Civil Service, Teachers, Police, and Armed Forces.

• These are almost always Defined Benefit schemes.
• Unlike private pensions which have a ‘pot‘ of money, most public sector schemes are ‘unfunded’This means there is no central pot; the pensions of retirees today are paid for by the contributions of workers (and taxpayers) today. 

What is an AVC? 

An Additional Voluntary Contribution (AVC) is a way to top up your workplace pension.

• If you’d like to save more than the standard amount, you can pay extra into an AVC pot attached to your main scheme.
• Why use it? AVCs are particularly popular for people in Defined Benefit schemes who want to build up a separate pot of cash to take as a tax-free lump sum, without reducing their guaranteed annual income. 

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Private pensions

Workplace pensions are fantastic for employees, but if you’re self-employed or want to save more than your workplace scheme allows; a private pension could be for you.

There are several options for private pensions depending on who you are, and how much freedom you want to choose your investments. The next guide will go through the possible options and how they work.