The Nutmeg personal pension centre

How do pensions work?

How do pensions work?

How your pension will work depends upon what kind of pension setup you’ve got. 


Defined contribution pension schemes

Defined contribution schemes are the most popular type of pension scheme. You could be enrolled in a workplace defined contribution scheme, whereby you pay in a percentage of your salary and your employer also pays in too. You could also decide to set up a separate personal pension.

With a defined contribution scheme, the income you get in retirement depends isn’t guaranteed. It depends upon how much you’ve built up in your pension pot and the performance of the investments, minus any charges.


Defined benefit pension schemes

Defined benefit pension schemes are also sometimes known as ‘final salary’ pension schemes. With a defined benefit scheme you’ll get a specified amount as income when you reach retirement age.
Your pre-determined retirement income will be worked out by calculating your salary and length of service. You may still have to pay contributions into a defined benefit pension scheme, and your employer usually will too.

Because these schemes vary from company to company, it’s best to speak to your pension administrator to get the full details of your scheme.


Pension limits and rules

Pension schemes are subject to limits on annual contributions as well as an overall lifetime limit. Find out how much you can pay into your pension.