Best Pension Options in the UK

Pension Investments

A pension is an amount of money put aside by an employer for the employee’s future benefit. Contributions are put together and invested on the employee’s behalf to generate income for the individual upon retirement. It is vital to manage pension fund investments or assets wisely so that workers can receive their benefits as promised when they retire. 


In the past, there was a limitation on pension plan investments, mainly in government securities, bonds, and stocks. The need for high return rates and changes in market conditions have influenced pension plan regulations to permit investments across asset classes; hence investments assign pension funds to various asset classes, some of which they may own or state owned. 


How Pension Investment Funds Work

Once employees retire, the lump sum they receive as benefits is a pension plan. It is usually a small percentage of their salary during employment years to retirement. The money is not left to lie idle, but it is invested in various schemes to earn interest for the worker. Upon retiring, the employee receives this amount plus interest accrued. Here are types of pension funds.

  • Open pension funds caretakers of a pension plan without membership restrictions

  • Closed pension funds only admit pension plans from specific workers, and they can further be subdivided into: Single, multi, related member, and individual pension funds.

Diversification and prudence make the mainstream investment style of a pension fund intending to allocate capital to several investment avenues like stocks, bonds, derivatives, or other investments. However, pension funds were only allowed to invest in government run securities like investment-grade bonds with high returns and blue-chip stocks for a long time. 


The constant need for high return rates has pushed markets to develop, hence the pension funds’ investments in many asset classes. Currently, most pension funds have transitioned from active stock holdings to passive investment, where they can keep stock indexes. Real Estate Investment Trusts (REITs) are perfect examples of passive investments among pension funds. 


Commercial real estate investments like offices, go-down, industrial parks, among others. New trends like devoting capital to other assets to pursue more returns have led them to commodities, high-yield bonds, hedge funds, and real estate.


One way to increase the return rate on pension funds is by investing in asset-backed securities like student loans or credit card debt. Private equity investments are also popular with pension funds as long-term investments into private companies. The purpose of investing in private equity is to cash out or sell the business once it is mature and worth much more.


An Overview of Pension Funds in the UK 

Taking part in the state pension system is compulsory in the UK, and there are two statutory state pension systems, namely, basic state pension and Work Pension (state second pension). They are financed through earnings-related contributions National Insurance contributions (NICs). 


Currently, men and women claim their benefits at age 66. The age limit has gradually increased from 65 and 60, respectively and is still expected to increase to 66, then 67, between 2026 and 2028. State pension cannot be claimed before the set age, but it can be deferred for higher amounts at the rate of 10.4% annually for each year of deferral. Bank of England can also pay it out as a one-time lump sum with 2% annual interest above the typical rate.


Regulations demand a yearly update on the basic state pension to align with average earnings, but the government can do so on a different index. Although the triple lock is not included in the law, the government has used it since 2021 to increase state pension, making it the highest average earnings. 


Members of State Pension can access pension credit as a reward for saving towards retirement. Pensioners receive an array of benefits like healthcare, travel and fuel payments. In the UK, there is no special disability pension. Still, state benefits are given to those who cannot work because of disability, in a separate category of the state pensions system.

Types of Pension in the UK

State Pension

A regular payment from the government that you can access after retirement. It is accessible to you once you reach the pension age of 66. Your total payment depends on the National Insurance record, and the amount you get depends on your National Insurance record. For more information on how the State Pension works and when you might get it, see our page State Pension.

Basic State Pension

An employee’s National Insurance record determines the payment of the basic State Pension. One year of contributing will get you some basic State Pension, and if your contributions were less than 30 years, your payment would be lower. Spouses or civil partners may qualify for a basic State Pension or an increment to their personal basic State Pension, which is also determined by their partner’s NI record.

Additional State Pension

It is an amount that builds above the basic State Pension if you were paid more. It changed over time as it started as Graduated Retirement Benefits before changing to State Earnings Related Pension (SERPS) and, later, the State Second Pension (S2P). These bodies were in place at different times and operated differently.

How the State Pension Works

Today the weekly remission for State Pension is £179.60 in the 2021/22 tax year, amounting to an annual income of £9,339.20. The amount can vary depending on your National Insurance Record.

The amount you get might be lower, as it depends on your National Insurance record. You must be a contributor for at least ten years to qualify for any State Pension and have a history of 35 years to get the entire amount. In other cases, the amount is higher than the weekly £179.60, meaning you’ll have a ‘protected amount’. In the old system, the amount builds to the privilege of Additional State Pension.

  • A workplace pension is an arrangement between an employer and employee to save for retirement. Below is a display of the various workplace pensions employees use.

  • Self-set up Pensions - If you are not employed, you can set up your pension to save for retirement. 

Types of Private Pensions


Private pension schemes are means to save money for the future for the employer or employee, and there are two types:

  • Defined contribution - A pension pot determined by how much amount is paid in

  • Defined benefit - A workplace pension given according to your salary and the time you have worked for your employer.


Defined Contribution Pension Schemes

They can be personal or stakeholder pensions, sometimes referred to as ‘money purchase’ pension schemes. Annuities that fit in this category are:

  • Workplace pensions - organised by an employer

  • Private pensions - set up by the employee

The money an employer pays you is invested as shares to grow your pension kitty; it can increase or decrease depending on how the investment performs in the market. Be keen to ask your pension provider where your assets are as retirement age approaches as some schemes move them to lower-risk assets. You are paid 25% of your pension free of taxes, and your pension provider takes a small fee for management. These factors determine the amount you take home:

  • The amount that was paid in

  • Performance of the investments - increase or decrement

  • How you rule to get paid: regular payments, a lump sum or small amounts.

Defined benefit pension schemes

The workplace pensions set up by your employer are known as workplace pensions. They are sometimes known as ‘final salary’ or ‘career average’ pension schemes. The amount you receive depends on the regulations on your pension scheme, not the investments or the amount you paid in. 

Some factors influence workplace schemes like salary and the length of time you work for an employer. Your pension provider promises to pay you a certain amount yearly until retirement, and you can settle to get 25% of the amount tax-free while the rest comes to you as regular payments.


Factors to Consider for Workplace pensions

Workplace pensions are on the increase in both private and public sectors. In 2019, over 88% of eligible employees participated in a workplace pension, indicating the positive impact of the workplace pension plan. Pension providers need to consider these crucial factors before providing a pension plan in the UK.

Choose a pension scheme

It may be a challenge to settle for a pension plan for your employees, but here are a few factors that can be of great help. 

  • Decide if you can sustain an automatic offer to enrol workers who wish to be part of the pension scheme. There must be a qualifying procedure that employees should meet to enrol automatically, consider their number, and several entry requirements.

  • Know, have associated costs for all transactions at hand.

  • Your pension plan and payroll should work seamlessly and effectively to ensure that you are set for a smooth process with the necessary expertise.

Filter Your Employees to Decide who qualifies for the workforce pension scheme

Assessing your staff from the day they begin working to determine which qualify for the workforce pension. Find a criterion that works for everyone by classifying them in one of the categories below by knowing what each earns and their contribution rates.

  • The workers you put in a workplace pension scheme must earn over 10,000 British pounds annually and are between 22 years old and the SPA (State Pension Age).

  • Those who do not need to be part of a workplace pension scheme. They can choose to participate, but it’s not mandatory to pay into it as their employer.

Provide written clarification to your team

As an employer, you have a legal duty to provide your workers with a written explanation detailing the pension scheme. Typically, employers should provide the explanation six weeks after workers start their tasks. 


Set up a declaration of compliance

Declaring your compliance is supposed to be within five months after duties commence, and if not, you attract fines. Employers in the UK must ensure that all pension related paperwork is completed on time and the information provided is correct.


Top Five Personal Pension Schemes

1- Halifax portfolio

The Halifax portfolio holds a Times Money Mentor gold award for the best customer support service, transparency, and complaints. With an award-winning ready-made portfolio, it is a good value for money, and they are openly displayed for the customer to have an easy journey making a choice. Halifax is also a low-cost platform charging 0.24% for fund management, whereas it is between 0.25 and 0.26% in other places. Opening a pension plan is free, and there is no charge for exiting or transferring costs to another pension provider.

2- Fidelity Personal Investing Cost Focus portfolio

Fidelity has an extensive range of ready-made portfolios, Fidelity is a significant investment fund in the UK with excellent pension plans. It is ideal for pensioners seeking averagely priced personal pension plans that make for the best pension products in the market. Fidelity requires you to take a self-invested personal pension SIPP to make maximum use of its pension funds to get a low-cost SIPP. You can use the Pathfinder tool on Fidelity to choose ready-made portfolios suitable for beginners.

  • Regardless of the portfolio you go for, they charge a 0.35% fee and nothing for investments over £1m.

  • You can choose from the five risk strategies, and they charge 0.20% fund management per year.

  • Low-cost portfolios primarily invest pensioners' money in tracker funds that operate the same as the stock market, but they are also actively managed by fidelity funds.


3- Evestor portfolio

Investors looking to begin investing small sums as low as £1 for their future will find Evestor a perfect fit. It is much less than the majority of existing pension providers, and it is one of the cheapest pension options in the market.

  • The platform charges 0.35% annually. Its small contributions beat all competition in fund fees charging 0.13% to 0.15% per year. There is no extra charge for transfer to a different provider. 

  • You can choose from three levels: low, medium and high, making it flexible for those who are careful to avoid being overwhelmed with investment contributions.

  • All portfolios are passively managed, meaning the investments are only tracked. 


4- Nutmeg Fixed Allocation portfolio

With actively managed holdings, Nutmeg offers three types of ready-made portfolios: fixed allocation, fully managed, and socially responsible. It is one of the UK’s pioneer online ready-made investment choices. There is also a variety of seven risk levels that pensioners can pick from to secure a financial future. 

  • Portfolios are actively managed in contrast to their low cost fixed allocations. Portfolios are invested in a range of exchange-traded funds but are actively managed. By comparison, its lower-cost fixed allocation products do not include active management. 

  • Nutmeg charges 0.75% for active management, and socially responsible portfolios are costly for those investing below £100,000, then drops to 0.35% to amounts over £100,000.

  • Fixed allocation portfolios fee is 0.45% yearly, decreasing to 0.25% over £100,000 and an extra fee of 0.19% on average fund management inclusive of transaction costs.


5- Vanguard Target Retirement portfolio


Vanguard is a robust, low-cost market portfolio with a fee of 0.15%.

  • Choose a pension portfolio focusing on your approximate date of retiring. The plan will change with time into lower-risk assets like bonds as the retirement date approaches. 

  • They charge 0.24% fund management and an extra 0.15% for the platform hence paying 0,43% annually.

  • It is cheaper for those with thousands to invest, rather than hundreds of thousands, as it is the most affordable pension plan on the market, and the investments will be mostly tracker funds.


Key Characteristics of the UK Pension Market 

  • Overview - The State Second Pension (S2P) plan is mandatory, but employers can leave and outsource occupational pension plans. They are popular (occupational pension plans) in the United Kingdom because the public pension plans are relatively low. Traditional DB plans were the norm in the UK, but most are now closed, giving way to DC plans. It is the employer who sets up occupational pension plans. Still, they are run under trust to benefit from tax exemptions and to ensure assets remain separate from the sponsoring employer.

  • Coverage - workers who opt out of S2P are free to join occupational pension plans.

  • Typical plan design - The regular defined benefit plans in the United Kingdom admit employees who have left the S2P system. DB plans require average employee contributions of 6% of their earnings.

  • Contributions - Money paid is agreed between the pension provider, employee, the saver, then put in a contract. Contributions can be remitted weekly, monthly or a one off payment. 

  • Benefits - Personal pension plans or money purchase plans can be disbursed as a lump sum or 25% of pension assets while the remainder is paid as annuities. Once the saver withdraws a pension, they can appoint a beneficiary to receive the benefits.

  • Fees - Stakeholder pension providers charge a maximum of 1.5% of asset value per year, but it goes down to 1% after a ten-year membership.

  • Taxation - All employee contributions, investment returns and capital gains are tax-exempt. Lump-sum payments are also tax-free.

  • Market information - The sizes of pension plans in the UK are unbalanced, with a majority taking large projects while over 50% of programs have less than 100 members. 


When You Should Hire a Financial Advisor


It is crucial to managing personal finances properly. If you don’t want to worry about your money, the easy way out is to hire a financial advisor. A financial advisor will aid you in the following ways:

  • Hold meetings with the pensioner to assess the current financial situation and plans.

  • Have a comprehensive plan that answers all your financial concerns like retirement, college planning, insurance, avoiding estate tax, and risks.

  • Give prompt advice anytime unexpected financial issues come up.

  • Open investment accounts and invest your funds.

  • Alert you when better or new investment opportunities come up.


Pension Investment Funds: FAQs


Is a pension plan worth it?

Pension plans have tax relief which is a significant advantage, and it comes in two forms depending on whether you are a basic-rate or higher-rate taxpayer. Some of the money you put in a pension plan gets tax back, but the investment gains are mainly tax-free. If you are below 75 years, you get the tax you have paid on all contributions back as an annual allowance.


How much should I put in a pension?

Workplace pensions are minimum contribution levels, but it is a smart move if you can contribute more. If you are in debt, it is prudent to consider before joining a pension plan, especially if the interest rates are high. A pension is only one way to plan for retirement but incorporating other ways is a better plan. Putting in as much money as possible on pensions early enough is the best recommendation for a comfortable retirement.


Can I have more than one pension plan?

Yes. Multiple pension plans will only equip you better for the future.


Can I invest in a joint pension scheme?

No, because there are no joint pension schemes.


Can I get a guaranteed retirement income?

Your retirement income from Social Security is likely a significant amount. Calculate the extra money you spend monthly, and figure out a way to bridge the gap.


Pension funds make promises to participants, guaranteeing them a future retirement income, meaning that they are pretty conservative with terms of risks. They have to achieve sufficient returns to make sure of those guarantees. 


Fixed-income securities and blue-chips stocks take a considerable chunk of pension holdings. Pensions have diversified in real estate asset classes, seeking more returns, but these details are minor parts of their holdings. 


It may sound unworthy of paying significant amounts to find investment opportunities, prepare budgets, or make financial plans. However, the service you receive is concise, timely, and ideal for increasing your economic stature for the future.