What is a workplace pension?
A workplace pension is a savings scheme organised by your employer. Contributions are taken straight from your salary. On top of your own payments, your employer will pay money into your pension, and the government will top it up with a tax refund, too.
Your employer is required by law to offer a workplace pension scheme. They also must automatically enrol eligible employees, unless they choose to opt out. This is called auto-enrolment.
A workplace pension is designed to provide you with an income during your retirement so you can’t access the money until you are 55, or later depending on the type of scheme you are in.
You can have a workplace pension alongside a personal pension or self-invested personal pension (SIPP), and they all can form part of your retirement income in tandem with your state pension. If you’re a senior company executive, and want to take full pension investment responsibility for yourself, you could also consider setting up a small self-administered scheme, or SSAS pension.
How do workplace pensions work?
Defined contribution pensions
Most workplace pensions are defined contribution schemes, also known as money purchase schemes. This means you make payments – or contributions – into your pension and that money is invested. The final value of your pot when you retire depends on the amount of money you pay in and the performance of your investments.
When you retire it will be your responsibility to manage your pot and turn it into an income that can, with some smart planning, last for the rest of your life.
Your employer should give you information about your workplace pension and a form to fill out saying how much of your salary you want to be paid in. That money will then be automatically deducted from your salary.
Defined benefit pensions
The other type of workplace pension is a defined benefit pension, also known as a final salary or career-average pension. People working in the public sector — for the government, NHS, teachers, army, fire service and so on — are likely to have one of these schemes, but the growing cost of maintaining them means they are now uncommon in the private sector.
With a defined benefit pension you receive a guaranteed income for life when you retire, based on your salary and the number of years you’ve been a member of the pension scheme.
Benefits of a workplace pension
As well as giving you a place to save for your retirement, your workplace pension may come with other benefits, including:
- A pension for your spouse or civil partner or dependants when you die
- An early pension if you have to retire due to ill health
- Life insurance that pays a lump sum or regular amounts to your family if you die while employed at the company
What benefits you get will depend on the scheme you are enrolled in.
How workplace pension contributions work
You pay a percentage of your earnings into your workplace pension. This is then topped up with tax relief from the government. The idea is you shouldn’t be taxed on money paid into your pension. So, when you make a payment into your pension the government pays tax relief equivalent to the rate of income tax you pay.
Basic-rate tax relief (20%) will be added automatically, but if you are a higher- or additional-rate taxpayer, you may have to claim the rest of your tax relief via your tax return. Alternatively if your workplace pension operates on a net pay basis. Your contributions are made before tax so higher rate tax is given automatically. Your HR or payroll department should be able to confirm the rate of tax relief you are getting as well as the method of tax relief.
Your employer will also make a contribution into your 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 you don’t meet the eligibility criteria for joining the scheme.
The impact of tax relief and government top-ups
Say you earn £30,000 and decide to pay 5% into your workplace pension. Your employer makes a 3% contribution too. That means each month £99 will be deducted from your salary after tax and paid into your pension. However, this includes £19.80 of tax relief, meaning it only costs you £79.20. Your employer will add another £59.40 meaning a total of £158.50 goes into your pension each month.
Opt out of your workplace pension, and that is a lot of free money you are missing out on.
Who qualifies for a workplace pension?
Under the law your employer must automatically enrol you in a workplace pension if you:
- 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 you are between 16 and 21 years of age, or between state pension age and 74, you can ask to join your workplace pension, as long as you earn at least £6,240 a year. Your employer will have to pay pension contributions for you 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 do you select investments in your workplace pension?
If you do nothing when you are automatically enrolled into your workplace pension, your money will be invested into the pension scheme’s default option. This is usually a lifestyle fund that targets growth when you are younger and gradually shifts your money into lower-risk investments as you approach retirement.
Alternatively, you can usually choose from a range of funds that your pension contributions are invested in.
How much can I pay into my workplace pension?
There are limits on how much money you can pay into your workplace pension and still receive tax relief on contributions. Your contributions, your employer’s contributions and your tax relief across all your pensions cannot exceed the annual allowance, which is £60,000 for the 2023/24 tax year.
You are also not allowed to pay more than 100% of your earnings (up to the annual allowance) each year.
What happens to my workplace pension if I die?
If you die, your workplace pension forms part of your estate and will be passed to your beneficiaries. The pension scheme will usually value your pension pot on the date of your death, and that will be passed on in accordance with your wishes.
It is important that you tell your pension scheme who you want to inherit your savings in the event of your death. Make sure you keep this information up to date. It is not unheard of for ex-spouses to inherit pensions because someone failed to update their beneficiary after a divorce.
What happens if I change jobs?
Your workplace pension belongs to you, that doesn’t change if you leave your job. You have a couple of options when you change jobs. You can:
- Leave your pension in your employer’s scheme and stop making contributions. Just make sure you keep the scheme up to date with your contact details so you don’t lose track of it.
- You can transfer your pension into a new workplace pension with your new employer or a standalone pension such as a SIPP. It’s worth seeking financial advice before you transfer your pensions, as depending on the type of pension you have it may not always be the best approach to consolidate them.
Many employers use a multi-employer pension scheme such as NEST. If this is the case, you may find that your new employer is part of the same scheme as your old employer and you can continue contributing to the same pension.
» MORE: All about pensions advice
How many pensions can I have?
There is no limit on the number of different pensions you can have. But the annual allowance limits the total amount you can contribute to your pension each year (currently £60,000).
If you have had several different jobs, you could have a number of different pension pots. You can track down lost pensions using the Pension Tracing Service.
Can I opt out of my workplace pension?
Yes, you can opt out of your workplace pension. Just be aware that you are turning down free cash if you do this. You’ll be missing out on the government contribution to your pension in the form of tax relief, and payments from your employer.
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A qualifying recognised overseas pension scheme – or QROPS – is a pension scheme based in another country that might prove a suitable destination if you wanted to transfer your UK pension scheme abroad. You should definitely consider getting advice before making a QROPS transfer.
You might have a guaranteed minimum pension if you were a member of a contracted out final salary scheme before April 1997. A GMP pension should pay a level of income that is at least comparable with how much you would have received if you had been contracted into SERPS.