Workplace pensions: A complete guide
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 pension scheme set up by your employer and is a tax-efficient way of saving and investing for your retirement. You pay a percentage of your salary into the pension every month and your firm also contributes. This makes workplace pensions – also known as occupational or company pensions – an attractive way of saving for your future.
What are the different types of workplace pensions?
Workplace 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.
Will I automatically be enrolled in my workplace pension?
All companies must provide a workplace pension scheme and you should be automatically enrolled if:
You’re aged between 22 and state pension age
You earn at least £10,000 per year
You’re classed as a ‘worker’ in the UK. For example, you’re not supplying your services through a limited company
Your company should write to you when you start work to let you know that you are being auto-enrolled.
If you choose to opt out for any reason and change your mind, your employer must auto-enrol you within 12 months.
What will my workplace pension contributions be?
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 £60,000 for the 2023/2024 tax year or 100% of your salary (whichever is lower).
What are the pros and cons of a workplace pension?
Workplace pensions are usually 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
Can I combine 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.
What are the workplace pension rules?
There are certain rules that govern how workplace pensions are run. These include:
Your employer cannot refuse if you want to join their pension scheme
Your employer does not have to contribute to the pension if you earn less than £520 a month
The employer must pay any minimum contributions on time
You are allowed to rejoin a scheme within a year if you’ve previously opted out
Employers must offer a new workplace scheme if they close the existing one
Can I opt out of a workplace pension?
Yes, you can choose to opt out of a workplace scheme at any time, but because of the employer contributions and tax benefits you should seriously consider whether it would be the right choice.
If you do opt out and want to rejoin, your employer must offer you the option to rejoin within a year. They must also enrol you back in at least every three years if you’ve opted out and you’re still eligible for automatic enrolment.
Other useful guides
We have lots of detailed guides to help you with your pensions decisions:
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