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Table of Contents
- What is a workplace pension?
- Finding a workplace pension provider
- How do workplace pensions work?
- How workplace pension contributions work
- Workplace pension tax relief
- Salary sacrifice pension schemes
- Who qualifies for a workplace pension?
- How much can be paid into a workplace pension?
- When can you access a workplace pension?
What is a workplace pension?
A workplace pension is a pension scheme offered by an employer to its employees. Contributions to a workplace pension are taken straight from an employee’s salary. Usually, an employer will also pay money into the pension, as will the government in the form of pension tax relief.
Employers are required by law to offer a workplace pension scheme. Eligible employees must be automatically enrolled in the scheme unless they opt out. This is called auto-enrolment.
A workplace pension can sit alongside a personal pension or self-invested personal pension (SIPP), eventually forming part of an individual’s retirement income alongside the state pension.
Finding a workplace pension provider
If you’re an employer needing to offer a pension to workers, you’ll need a workplace pension provider. A list of providers willing to work with smaller businesses can be found on The Pensions Regulator website. This includes the National Employment Savings Trust (NEST), a government-backed workplace pension scheme. Alternatively, you may prefer to enlist the help of a financial adviser or your accountant to help find a suitable scheme.
How do workplace pensions work?
Defined contribution pensions
Most workplace pensions are defined contribution schemes, also known as money purchase schemes. The contributions made into the pension are invested, often into shares, by the pension provider. The final value of an individual’s pension pot depends on the amount of money paid in and the performance of the investments.
At retirement, there are several options for accessing and cashing in a pension. These include securing an income, making ad hoc withdrawals, and taking up to 25% of the pot as a lump sum tax-free.
Defined benefit pensions
The other type of workplace pension is a defined benefit pension, also known as a final salary or career-average pension. These schemes are more common in the public sector – for the government, NHS, teachers, army, fire service and similar – and less likely to be offered in the private sector.
Rather than being based on contributions and investment performance, a defined benefit pension pays out a guaranteed income for life at retirement based on the employee’s salary and the number of years they’ve been a member of the pension scheme.
How workplace pension contributions work
Employees that remain opted into a workplace pension must pay a percentage of their earnings into the scheme each month. Their contribution is automatically deducted from their salary and topped up with tax relief from the government, equivalent to the rate of income tax they pay. The minimum employee contribution is usually 5% of their ‘qualifying earnings’ – this is income from employment of between £6,240 and £50,270 before tax.
Employers must also contribute to a qualifying worker’s pension. Under auto-enrolment rules, all employers must pay at least 3% of all eligible employees’ qualifying earnings into the scheme. The only exception would be if they don’t meet the eligibility criteria for joining the scheme.
Workplace pension tax relief
Basic-rate tax relief (20%) is added to an employee’s pension automatically. Higher or additional-rate taxpayers may have to claim the rest of the tax relief they are owed by completing a self assessment tax return if an employer takes their contribution after taking tax and National Insurance from their pay (known as ‘relief at source’). This may not be necessary if a workplace pension operates on a net pay basis, and contributions are made before tax.
Salary sacrifice pension schemes
Employers may also offer salary sacrifice as part of a workplace pension scheme. This involves an employee agreeing to a reduction in salary, which is then paid directly into their pension by the employer instead (alongside the usual employer contribution).
The lower salary means that both parties may pay less National Insurance. This can also increase the take-home pay of an employee, by paying less in Income Tax, but can also be a cost saving for employers (though some choose to pay this to their employee’s pension as well).
Who qualifies for a workplace pension?
Under the law an employer must automatically enrol an employee in a workplace pension if they:
- Are at least 22 and under state pension age
- Earn at least £10,000 a year from that job
- Work in the UK
- Are not already enrolled in a workplace pension scheme
If an employee is between 16 and 21 years of age, or between state pension age and 74, they can ask to join the workplace pension, as long as they earn at least £6,240 a year. An employer will have to pay pension contributions too.
Anyone earning less than £6,240 a year can still ask to opt into their workplace pension, but their employer does not have to contribute to their pension.
How much can be paid into a workplace pension?
There are limits on how much money can be paid into a workplace pension and still receive tax relief on contributions. The sum of an employee’s contributions, an employer’s contributions and the tax relief received across all of someone’s pensions cannot exceed the annual allowance – which is the lower of either 100% of an individual’s earnings or £60,000.
When can you access a workplace pension?
Because a workplace pension is designed to provide an income during retirement, the earliest it can usually be accessed is 55, or maybe later, depending on the scheme. Note that this minimum pension age is rising to 57 from 6 April 2028.
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