What's the difference between a State Pension and a workplace pension?

Pensions. Most of us need one, but many are in the dark about the different kinds of pensions and how they work.

In this blog, we shed light on the difference between a state pension and a workplace pension.

The State Pension

This is the pension that most people will receive from the Government when they reach the official retirement age. For many years this used to be 60 for women and 65 for men.

But the increasing number of older people, and the need to support them, means that the pension age has been rising steadily. Currently, it’s 66 for both men and women and, for anyone born after 5 April 1960, this is set to rise to 67 and, eventually, 68.

The full amount of a new State Pension for men born on or after 6 April 1951 and women born on or after 6 April 1953 is currently £203.85 a week. The full rate for people who reached pensionable age on or before 5 April 2016 is £156.20 a week – known as the ‘old State Pension’.

You won’t get your state pension automatically - you have to claim it. You’d typically get a letter no later than two months before you reach state pension age. Usually, the Government will pay this money into your bank account every four weeks. Whatever your age right now, you can check State Pension levels online that you’re likely to receive.

To get the full amount of State Pension you must have made a minimum amount of National Insurance contributions over your working life. For the new State Pension, this is the equivalent of at least 35 years’ worth, for the old State Pension you’ll need to have at least 30 years’ worth.

Anyone who has only paid a fraction of the total number of qualifying years will receive an equivalent proportion of the full amount.

But what if you don’t have enough years of contributions? Since 2006, the Government has been letting people make top-ups to fill National Insurance record gaps.

Taxpayers have up until 5 April 2025 to make their extra contributions before the State Pension deadline.

Need to check how many years of contributions you’ve made already? There is an official contributions checker that will be able to give the answer.

The workplace pension

The workplace pension, on the other hand, is completely separate from the State Pension. Employers have to set up a workplace pension and contribute to their eligible employees.

There are two main types of workplace pensions – defined benefit and defined contribution schemes.*

Defined benefit pensions, also known as final salary pensions, guarantee a pre-determined income at retirement. A person's average salary and years of employment with an employer determine defined benefit pensions. For this type of pension, an employer always makes contributions and the employee may have to as well.

In defined contribution schemes both the employer and the employee always contribute. The total contribution from you and your employer must be at least 8%. The employer must contribute a minimum of 3% of your qualifying salary. So if the employer pays 3% of the employee’s gross salary, the employee would need to pay at least 5%.

Anyone with a workplace pension will have an account number within their employer’s scheme. They’ll be able to check how much is in their pension pot at any time. If your pension is a defined contribution scheme, the provider must send you an annual statement. If you're in a defined benefit pension scheme then your provider doesn’t have to automatically send you an annual statement. Having said that, many providers do. If you're not sure who's managing your pensions and aren't receiving regular statements, you may need to track down your pensions.

The minimum age for getting your workplace pension is 55. However, you can delay as long as you like, perhaps to coincide with getting your state pension.

Pensions for the self-employed

There’s also an equivalent to the workplace pension for the self-employed – known as personal pensions. Personal pensions are defined contribution pensions without the 3% employer contribution.

Instead, as a self-employed person you decide what level of contribution you want or can make each month. You can use a recognised pension provider to make investment decisions within a personal pension or to take out a SIPP. SIPPs (self-invested personal pensions) offer more choice and control over how you invest your contributions. SIPPs are best left to people with some investment knowledge and experience. The value of your investments can go down as well as up, so you may get back less than you put in. So it’s important to do your research and make sure you understand the level of risk you’re taking first.

So how much do you need to retire?

For many of us, this is the million dollar question. It’s not an easy one to answer as there are so many variables to consider. For example, will you need the same income when you retire or can you get by on less? And do you plan to downsize and release equity from your home?

So planning your needs in retirement is something that you should consider sitting down and working out with a good financial adviser. They can assist in determining the needed contributions until retirement to achieve your required level of income.

Of course, there’s a lot more to pensions than we’ve covered here and this article is a good place to start.

The sooner you start paying attention to how you’ll pay for your retirement, the more comfortable your post-work years will be.

Our Smart Money People reviewers have shared their thoughts on the pension providers they use. Find out what you can expect by reading the good and bad experiences.

*Some pensions are a middle group between the two e.g. ‘hybrid’ or ‘cash balance’ pensions.