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.
Workplace pensions, also known as company pensions, are where a percentage of your salary is automatically taken each payday and added into the pension scheme. Your employer may also add money into your pension, and you may get tax relief from the government.
Workplace pensions are arranged by your employer.
There are 2 main types of workplace pension:
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 2023/2024 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 with total earnings of £26,240 a year, making your qualifying earnings £20,000:
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.
Depending on the scheme and your circumstances, you may be able to take 25% of your pension tax-free. You’ll then need to pay income tax on the remaining 75%.
Yes, you can opt out of a company pension if you want to.
You may have been automatically enrolled to the workplace pension scheme by your employer. If you want to opt out, contact your pension provider. Your employer will be able to give you more information on how to do this.
If you’ve not been automatically enrolled, speak to your employer about what to do.
Yes, you can have a self-invested personal pension (SIPP) and a workplace pension. You should be able to pay into them both at the same time, if you want and can afford to do so.
You don’t need to have an SIPP alongside your workplace pension, but it may give you more financial freedom with where your pension is being invested.
Our financial advisers can talk to you about SIPPs. If you don’t want to take advice and are considering a SIPP, make sure you understand the financial market, and have time to actively manage your investment. Remember, investments can rise as well as fall so you may get back less than you invest.