How Workplace Pensions Work
With so many different workplace pension schemes, it can be confusing to understand the different workplace pension rules and contributions. In this guide, we will tell you everything you need to know about your workplace pension and explain how the contributions work.
What is a workplace pension?
Workplace pensions are set up by your employer and are a great way of saving for your retirement. As workplace pensions are set up by your employer, your pension contributions are deducted directly from your wages before they reach your bank account. Your employer will also contribute to your workplace pension along with the government in the form of tax relief.
Employers are required to offer workplace pensions by law and will automatically enrol you into the scheme when you become an employee. You can opt-out if you wish to.
Who qualifies for a workplace pension?
Your employer will automatically enrol you into their workplace pension if the following applies:
- You are 22-years-old or older but are under the state pension age.
- You earn at least £10,000 from that employer.
- You work in the UK.
How workplace pensions work
Most workplace pensions are defined contribution pensions (we explain the different types later on.) This means that the total value of your pension depends on how much you’ve paid in and how the investments perform over time.
When you start a new job, your employer will provide you with information about the workplace pension, which you’ll have been automatically enrolled into. The information will allow you to agree what percentage of your salary you’d like to contribute to your pension each month. There will be a minimum amount but you can also increase the percentage if you’d like.
Your pension contributions will now be automatically deducted from your wages before you get paid each month. Your employer will also contribute to your pension and the government will add tax relief.
The government tax relief works as follows:
| Tax bracket | You pay | HMRC pays | Total payment into pension | Further tax relief | Cost to you |
| Basic | £80 | £20 | £100 | £0 | £80 |
| Higher | £80 | £20 | £100 | £20 | £60 |
| Additional | £80 | £20 | £100 | £25 | £55 |
You’ll continue adding to your workplace pension for as long as you work somewhere. This pension money will be available when you retire, even if you’ve changed jobs since.
How workplace pension contributions work
You pay a percentage of your earnings into your workplace pension. The minimum required total contributions to a workplace pension is currently at 8%. The minimum amount your employer must contribute is 3%. So, you might contribute 5% of your monthly salary to your workplace pension and your employer will contribute another 3%.
Some employers might contribute more than 3%, it depends on the benefits your company offers.
On top of this, government tax relief is also added to your workplace pension, please see the table above.
How much can I pay into my workplace pension?
To still receive tax relief on your pension contributions, you can’t exceed the annual allowance of £40,000. This includes your contributions, your employer’s contributions and the added tax relief.
You also can’t pay more than 100% of your earnings into your workplace pension each year. Other than these limitations, you can contribute as much of your salary as you’d like each month. Whilst it is a good idea to save a significant amount towards your retirement, make sure you keep enough of your salary each month to live comfortably.
How do you choose the investments in your workplace pension?
If you don’t do anything when you’re automatically enrolled into a workplace pension, then your contributions will be invested into the pension’s default option. Usually, the default investments target growth in your younger years and switch to low-risk investments as you get older.
If you understand investing, you can choose where your pension is invested. Please note, you risk losing the money you contribute if you make risky investments. The value of investments can go up and down.
What happens to my workplace pension when I change jobs?
Don’t worry, your workplace pension won’t disappear when you change jobs! You have two options when you change jobs:
- Leave the pension as it is - you can simply leave your old workplace pension as it is and just stop making contributions. Remember to keep the old pension up to date with your contact details or you could lose track of it.
- Transfer the pension - you could transfer your old workplace pension to your new workplace pension or a personal pension. We would recommend discussing this with a professional before transferring your pension as it might impact its value.
Many employers use the same pension scheme so you might find that your new employer offers the same workplace pension. If this is the case, you can continue contributing to the same pension in your new job.
Different types of workplace pension
There are two main different types of workplace pension, defined contribution pensions and defined benefit pensions. We will explain the key differences below:
Defined contribution workplace pension
The majority of workplace pensions are defined contribution schemes. Defined contribution means that you make contributions into your pension and this money is invested. The value of your final pension pot is determined by how many contributions you made and the overall performance of your investments.
When you retire, it’s your responsibility to manage the pension pot and ensure that it provides regular income for the rest of your life.
Defined benefit workplace pension
A different type of pension is the defined benefit pension, also known as ‘final salary’. Defined benefit pensions are usually for people in the public sector, such as the government and NHS. Defined benefit pensions give you a guaranteed income for life when you retire. This is based on your salary and how long you’ve been a member of the pension scheme.
Depending on your employer, you may be able to pay into a defined benefit pension scheme. Your employer will be responsible for the investment choices.
How do I find out my workplace pension scheme?
Your employer should have provided you with the details of your workplace pension scheme when you first started your employment. However, if you’re unable to find out, you can fill out a request form using the government’s find pension contacts service.
Should I get a workplace pension?
As you’re automatically enrolled into a workplace pension, you have to actively decide and request to opt-out. We wouldn’t recommend opting out of your workplace pension because it’s important to save for your retirement and the standard state pension isn’t enough on its own.
Also, as your employer is contributing a minimum of 3%, it’s technically like getting a pay rise! So, don’t say no to free money and build up your workplace pension from a young age to ensure a comfortable retirement.
Benefits of a workplace pension
The obvious benefit of a workplace pension is saving for your retirement whilst you’re still working. However, there are other benefits to take into account…
- Your employer pays into your pension too, so you gain extra money.
- Your pension contributions benefit from tax relief.
- Your contributions could grow from potential investments.
- Workplace pensions usually have fewer fees and charges than personal pensions.
- Your spouse and children can inherit the pension if you were to pass away.
Some workplace pensions will also have additional benefits, it depends on your employer and pension provider.
When can I take money from my workplace pension?
The earliest you can access your pension is when you’re 55 but some workplace pensions might not let you until later, it depends on the pension provider. You might be able to access your pension earlier if you’re suffering from ill health but this depends on the pension provider.
The first 25% of your pension can be taken out as a tax-free lump sum. You’ll be charged standard income tax on the remainder of your pension as you withdraw it.
