Our guide to workplace pensions
A workplace pension could be your best option for saving for retirement. But what is a workplace pension and how do they work?
What is a workplace pension?
A workplace pension is a tax-efficient way of saving and investing for your retirement through a pension scheme set up by your employer.
You usually pay a percentage of your salary into the pension every month, with the big advantage of a workplace scheme being that your firm also contributes.
Workplace pensions can also be known as occupational or company pensions.
How do workplace pensions work?
As part of your contract of employment, you are usually offered the chance to join the pension scheme.
A portion of your pay will then be paid into the scheme each month, with the employer often putting in an agreed amount. You’ll also receive tax relief on your contributions.
Your contributions will be invested on your behalf with the aim of growing a pension pot you can use in retirement.
Some schemes will also provide other types of benefit, such as financial support for your partner should you die.
What are the different types of company pensions?
Company pensions can be split into occupational pensions or stakeholder pensions (also known as group personal pensions)
Occupational pensions
These are set up by employers to provide pensions for their staff and can either be a final salary (or defined benefit scheme) or money purchase (or defined contribution scheme.)
Final salary schemes. Your pension is linked to your salary and based on your pay at retirement and the number of years you’ve been in the scheme. It doesn’t rely on the performance of investments. You pay a percentage of what you earn, and your employer pays the rest. Final salary schemes are now rare, and most employers no longer offer them as they are very expensive for companies to run
Money purchase schemes. The money you pay in is invested (usually in the stock market through equity funds) and your pension is based on how the underlying investments perform. You'll usually pay a percentage of your wages into the scheme and your employer also pays in a regular amount. Your employer may also have to offer you automatic enrolment into a workplace pension, in which case they will be obliged to make contributions
Stakeholder pensions
Stakeholder pensions or group personal pensions are similar to private pensions. Your employer organises the scheme, but your contract will be directly with the pension provider.
The main difference from arranging a personal pension yourself is that with a stakeholder scheme the investment choices may be made for you by the provider. Your employer may contribute, but they are not obliged to do so. This type of pension could be an option if you are not eligible to be automatically enrolled into your workplace pension scheme.
What is the difference between a workplace pension and a private pension?
A workplace pension is one set up through your employer where the firm often contributes and the chosen pension provider makes the investment.
A private pension gives you more flexibility and choice over how to grow your pension pot, although while you still receive tax relief, you don’t get any extra contributions from the company you work for.
What are the pros and cons of work-based pensions?
Work-based pensions are usually always a good first option for saving for retirement and are worth taking advantage of, particularly if your employer will contribute into your plan too. But there are one or two downsides to consider:
Advantages
A tax-efficient way of saving for retirement
Your employer will usually contribute
Your contributions are automatically taken each month so it’s straightforward
Disadvantages
There may be a limited choice of investments
You could have little control over how the scheme is run and the investment decisions - not all schemes will perform well and fund charges could eat into your investment returns
Your employer may not contribute as much as you’d like
Does my employer have to give me a pension?
In the UK, your employer must enrol you into a pension scheme and make contributions to your pension if you’re eligible for automatic enrolment. This means you’re aged between 22 and State pension age and earn at least £10,000 per year.
Even if you aren’t automatically enrolled into your work pensions scheme, you can still ask to join and the employer cannot refuse – although if you earn less than £520 a month they do not have to contribute.
Can I choose how much I pay into my workplace pension?
Yes, there is usually a degree of flexibility in how much you can pay into your workplace pension.
With an auto-enrolment pension, the total minimum contribution is 8% with the employer’s minimum contribution being 3%. In some schemes, if the employer agrees to pay more, then you can pay less.
You can pay as much as you like into your pot, but the maximum you can pay into all of your pension plans combined before being taxed is £40,000 for the 2022/2023 tax year.
What happens if I have multiple pension pots from different jobs?
If you have multiple pension pots then it might seem to make sense to consolidate them all in one place.
While this is a possibility, there are some factors to consider including the type of pensions, how much they are worth and how well they are being managed.
Consolidating your pensions might help you keep better track of your pension savings. You might also be able to save money on charges and achieve better growth. However, this is not always the case and if you’re unsure, it is wise to take independent financial advice.
Will I get tax relief from a workplace pension?
Yes, as with other pension savings in the UK you will receive tax relief on your contributions. For a basic rate taxpayer, the government will add 20p in tax relief for every £1 saved. For higher and additional rate taxpayers there is more tax relief available which can be claimed through your annual tax return.
Other useful guides
We have lots of detailed guides to help you with your pensions decisions:
What types of pension plan are available?
Should I have a savings account or pension?
How much should I be paying into my pension?
Compare pensions with MoneySuperMarket
We’ve teamed up with Profile Pensions to help you choose the right private pension plan for your needs, using funds from the whole of the market. Open a new pension with Profile Pensions and you can make regular or one-off contributions as you wish. You can easily transfer old pensions into your new personalised plan if you want to and Profile Pensions can help track down any old pensions if you need them to. You’ll get your own dedicated pension adviser as soon as you sign up to answer any questions you have.
Capital at risk. This website does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact your Profile Pensions dedicated adviser. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. MoneySuperMarket.com Ltd is an Introducer Appointed Representative of Profile Pensions, a trading name of Profile Financial Solutions Limited which is authorised and regulated by the Financial Conduct Authority. FCA number 596398. Registered in England & Wales, Company Number 07731925. Registered office address: Norwest Court, Guildhall Street, Preston, PR1 3NU.