Ideally you’ll put a proportion of your income away while you’re working so you’re financially comfortable when you retire.
There are schemes and tax concessions to help employees build their retirement savings faster.
All employers have to provide a workplace pension scheme. They should automatically enrol you in that scheme if you’re:
All four of these must apply to you for you to qualify for auto-enrolment. You have the right to opt out if you don’t want to join the workplace pension, but only after you’ve been auto-enrolled.
If you don’t qualify, you still have the right to opt into a workplace pension if you’re either a non-eligible jobholder or an entitled worker.
You count as a non-eligible jobholder if you fall into either of these groups:
If the following all apply to you, you’re an entitled worker:
If you don’t qualify for auto-enrolment and you’re not a non-eligible jobholder or an entitled worker, you can still take out a private pension to save for your retirement.
The government requires that the total minimum contribution is 8% of your qualifying earnings. These include things like overtime and bonuses as well as your basic salary. The lower and upper limits for qualifying earnings for the tax year 2020/2021 are £6,240 to £50,000. That means your employer doesn’t have to contribute to a workplace pension if your income is below:
If you earn more than this, your employer must contribute 3%, but can choose to contribute more. If your employer contributes 3%, you’ll need to contribute at least 5% of your salary.
If your employer chooses to pay more, you can put in less as long as your overall contributions meet the total minimum contribution of the scheme, which has to be at least 8% but can be higher. For example, if your scheme has a minimum contribution of 8% and your employer contributes 4%, you’ll only need to contribute a minimum of 4%.
Your contributions to your pension do benefit from tax. This will work either through:
Check with your employer to find out what the tax arrangement is for your pension contributions.
You may be able to save on National Insurance contributions by using salary sacrifice (a pre-tax contribution). In some instances, your employer may also match any extra contributions, so you’ll be making that money work twice as hard. Again, it’s a good idea to chat to your employer to find out what they offer.
Before making any decisions, look into any possible impacts of salary sacrifice – positive and negative. For example, reducing your taxable income might take you below the threshold for things like the High Income Child Benefit Charge. But it could also limit how much you’re able to borrow for a mortgage.
See more about the pension tax relief from the Money Advice Service.
There are two main types of workplace pension - defined contribution (also called 'money purchase' schemes) and defined benefit (sometimes referred to as 'final salary' schemes).
A defined contribution scheme is a pension pot which builds up according how much is paid into it. A defined benefit scheme is based on your salary and the length of your employment.
Typically, if you have a defined contribution scheme, your workplace pension will be invested and you’ll have the opportunity to choose from a selection of different investment strategies. You won’t be involved in the day-to-day decision making, but you can see how the fund you select performs and make changes if you need to – this can be done annually.
If you don’t choose the type of investment strategy, your employer may have a default fund that your pension will be invested in.
At the moment, pensions can be accessed from the age of 55. This will rise to 57 from 2028 and then 10 years below State Pension age.
Some workplace pensions may have a normal retirement age that’s higher than this, but you should be able to access a defined contribution scheme earlier than this without penalty. However, defined benefit schemes may reduce the benefits if they’re taken earlier than the normal retirement age.