Workplace pensions

A workplace pension is a way of saving for your retirement that’s arranged by your employer. Most employers must now automatically enrol their workers into a workplace pension.

What are workplace pensions?

Workplace pensions are set up by employers to let you save money for retirement. The employer normally has to make you part of the pension scheme, and pays into it for you.

Some workplace pensions are called ‘occupational’, ‘company’ or ‘work-based’ pensions.

Generally, there are two types of workplace pensions:

  • Defined benefit pensions
  • Defined contribution pensions

There are also pensions that are a middle group between the two. These are called ‘hybrid’ or ‘cash balance’.

When you join the scheme, you’re usually given a booklet or online information with information about it. This would give you details of the benefits.

If you no longer have the booklet or online access, contact the scheme administrator and ask for details.

Defined benefit pensions

These pay a retirement income based on your salary and how long you’ve been a member of the scheme.

They’re generally only available in the public sector or in older workplace pension schemes.

You’ll usually contribute a percentage of your salary each time you get paid. Your employer will also make contributions. This makes sure you get the income you’re promised when you retire.

You’ll usually be in either a ‘final salary’ or ‘career average’ scheme.

Defined contribution pensions

The most common way to save for retirement is to use a defined contribution scheme to build up a pot of money. You’ll use this to give yourself an income when you retire.

When you work for an employer, even if it’s a small business, they need to set up a workplace pension and enrol you into it.

Every payday, a percentage of your pay is put into the pension scheme automatically.

In most cases, your employer also adds money into the pension scheme as well.

If your work gives you access to a pension that your employer will pay into, staying out is like turning down the offer of a pay rise.

You also get tax relief on your contributions from the government. For example, if you contribute £10, the government will add £2.50, and your employer will usually contribute at least £7.50. So you get £20 invested.

Unless you really can’t afford to contribute, or your priority is dealing with unmanageable debt, it makes sense to join.

Your money is then invested so it can grow.

When you’re over 55, you can use your money in the way that best suits you.

That might be getting a guaranteed income, taking a flexible retirement income or a mixture of both.

There are three options employers might choose when looking to set up a defined contribution pension for their workers. These include:

  • An individual trust pension scheme – a pension scheme that’s only available to that employer and its workers. Trustees run the scheme in the best interests of members (i.e the workers of that company).
  • A master trust pension scheme – a pension that can be used by separate employers and their workers. Trustees run the scheme in the best interests of all the members (i.e. the workers of all the companies that are using the pension).
  • A group personal pension – a type of workplace pension set up by your employer. It’s a collection of individual pension plans – and one of these plans will belong to you.

As well as these main options, there are some others that smaller companies or directors of companies might set up.

These have more complex arrangements that offer more features.

One example is a small self-administered scheme (SSAS).

A small self-administered pension scheme is a type of defined contribution workplace pension that can give extra investment flexibility.

Contributions to workplace pensions

If you’re in a workplace pension, your employer decides the levels of contributions to the scheme.

Usually, they’ll contribute and require that you contribute at least a minimum amount too.

If you decide to contribute more, your employer might decide to ‘match’ these extra contributions.

The contributions are usually a percentage of your earnings, although it could be a monetary amount.

Your employer will set workplace pension rules to define which parts of your earnings are included for contributions. This is known as ‘pensionable earnings’.

If the scheme is being used for automatic enrolment, generally ‘earnings’ will cover all your taxable income from your employer.

If you are in an automatic enrolment scheme, your employer must contribute a minimum of 3% of your pensionable salary. And the total contribution from you and your employer must be at least 8%. That means if your employer contributes 3% you must contribute 5%.

You’ll get tax relief on any contributions that you pay, subject to certain conditions.

An example of tax relief on contributions

  • You’re in a defined contribution pension scheme
  • Each payday, you put in £40 and your employer puts in £30
  • You get £10 tax relief
  • £80 goes into your pension

Think about how much you can afford to contribute to the scheme, so you are on track for the retirement that you want. 

If you’re joining a new workplace pension, but already have one from a previous employer

When you left your previous employer, your old pension provider should have written to you to explain your options under the scheme.

If they haven’t and you have their details, contact them and get them to explain what your options are.

If you were in a defined benefit scheme, it’s usually best to leave the pension where it is and the Trustees will look after it for you.

When you retire, it’ll then pay you an income for the rest of your life.

If you were in a defined contribution scheme, you’ll often have two options:

  • Leave the pension where it is. It will continue to be invested and hopefully grow over time. You can decide how to use it later. You might even be able to continue to contribute to it if you want.
  • You can move the money to your new pension provider, called transferring your workplace pension. This can make it easier to keep track of and manage your pensions. It might even save you costs too, as you won’t be paying each provider separately.

There can be benefits and drawbacks to bringing your pensions together.

Where your workplace pension is invested

Defined contribution schemes

When you join, you’ll normally be offered the option of choosing your own investments.

If you don’t choose yourself, your money will be invested in a fund selected by the pension scheme. It might be referred to as a ‘default’ fund, and will be designed to suit a broad range of people.

If you’re invested in the default fund, you might find that your money is put into a lifestyle fund.

This is a fund that works by moving your money into lower-risk investments as you approach retirement.    

If you want to choose your own investments, the scheme will usually offer a range of funds. This is so you can tailor your investments to suit your needs and preferences. 

Defined benefit schemes

If you’re a member of a workplace defined benefit scheme, you’re not responsible for the investment decisions.

Your scheme promises your retirement income. So it’s your employer who makes the investment decisions and chooses the risks needed to reach that target.

If you’ve lost track of your pension details

If you’ve lost track of your pension details, the Pension Tracing Service can help you to find the contact information. This is a free, government-backed service.

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Whatever your circumstances or plans, move forward with MoneyHelper.

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