A workplace pension is essentially a savings scheme that you, your employer and the government pay into for your later life.
We know the word 'pension' can be a turn-off. But it pays to get to grips with your employer's workplace pension and how it works.
That's because the more of your income you can put away now while you're working, the more financially comfortable you'll be in the future.
Here's what else you need to know.
All employers have to provide a workplace pension scheme. They should automatically enrol you in their scheme if:
All 4 of these must apply for your employer to enrol you in their workplace pension.
If you don't qualify for auto-enrolment, you can usually still join your workplace pension anyway if you want to. Your employer can't refuse.
There are 2 main types of workplace pension:
defined contribution, also called 'money purchase' schemes
defined benefit, sometimes referred to as 'final salary' schemes
A defined contribution scheme is where your pension pot builds up according to how much is paid into it. Your money will be invested in the default fund that your employer has chosen. You may be able to choose to have your money invested into other funds.
A defined benefit scheme is normally based on your salary and how long you worked for your employer. For most schemes, you'll get a percentage of your final salary for each year you've worked for them.
If you earn more than £520 a month (or £120 a week), your employer must contribute a minimum of 3% of your qualifying earnings. You'll also need to contribute at least 5% of your qualifying earnings.
Your qualifying earnings are everything you earn between 2 limits set by the government.
They include salary, wages, bonuses, commission, statutory sick pay, paternity and maternity pay and overtime.
These limits are reviewed annually and for the tax year 2022/2023 are between £6,240 and £50,270. So, the maximum qualifying earnings are £44,030 (£50,270 minus £6,240).
Pension tax relief is when the Income Tax you'd normally pay to the government goes towards your pension instead.
This is one of the best features of using a pension. It can help reduce the amount of tax you pay and boosts your savings for the future.
There are 2 methods for getting tax relief on your pension contributions, either through 'relief at source' or through your net pay. Check with your employer to find out what the tax arrangement is for your pension contributions.
Here's an example of how much tax relief you have total earnings of £26,240 a year, making your qualifying earnings £20,000:
You put in £1,000 a year (5% of £20,000).
Your employer puts in a further £600 a year (3%).
You get £150 tax relief from the government.
So, a total of £1,750 goes into your pension.
If your employer offers to match any extra contributions you make, you could get even more 'free money' in your pension pot. It’s a good idea to chat to your employer to find out if they offer this benefit.
See more about the pension tax relief from the MoneyHelper.
Most workplace pensions set an age when you can take your pension, usually between 60 and 65. Ask your employer about when you'll be able to access your pension.
Normally it's best to hold off from accessing your workplace pension for as long as you can afford to – certainly until you're no longer working full-time. This gives more time for your pension to grow and for you to make further contributions to it.
You should also be careful of firms offering ways to take your pension before the age of 55. Taking your pension early in this way could mean you pay tax of up to 55%. Beware also of pension scams.