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 when you retire.
Here’s what else you need to know.
All employers have to provide a workplace pension scheme. They should automatically enrol you in that scheme if you’re:
All 4 of these must apply for your employer to enrol you in their workplace pension. There are also other reasons why your employer may not enrol you into their scheme.
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.
You can usually still join your workplace pension if you want to. Your employer cannot refuse.
Your employer doesn’t have to contribute to a workplace pension if your income is below:
£520 a month
£120 a week
£480 every 4 weeks
These figures are correct for the 2021/2022 tax year. Whether you’ve been auto-enrolled or joined voluntarily, if you earn more than this, your employer must contribute a minimum of 3% of your qualifying earnings and you’ll need to contribute at least 5% of your qualifying earnings.
For example, if you put in £40 each payday:
Your employer puts in £30.
You get £10 tax relief.
A total of £80 goes into your pension.
These figures assume the scheme is applying the minimum contribution rules and you earn £1,520 per month.
If your employer chooses to pay more, you can put in less (subject to the scheme’s rules), as long as your overall contributions meet the total minimum of the scheme. This has to be at least 8% of qualifying earnings 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 relief if you pay tax and you contribute to your workplace or personal pension. This will work either through:
relief at source - your pension provider claims basic rate tax relief on your contributions and then adds this to your pension plan. Even if you don’t pay Income Tax, you’ll still get an additional payment
net pay - your pension contributions are deducted by payroll before tax and then paid gross into the scheme
Check with your employer to find out what the tax arrangement is for your pension contributions.
You and your employer may be able to save on National Insurance contributions and pay less tax by agreeing to use salary sacrifice. This is sometimes known as a SMART scheme (Save More and Reduce Tax). If you do this, you give up some of your salary and your employer pays this straight into your pension.
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 Tax Charge. But it could also limit how much you’re able to borrow for a mortgage.
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.
See more about the pension tax relief from the Money Advice Service.
There are 2 main types of workplace pension:
defined contribution, also called 'money purchase' schemes
defined benefit, sometimes referred to as 'final salary' schemes or Career Average Revalued Earnings (CARE) schemes
A defined contribution scheme is a pension pot which builds up according to how much is paid into it. A defined benefit scheme is normally based on your salary and how long you worked for your employer.
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 or to opt for the default fund that your employer has chosen. 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.
At the moment, pensions can be taken from the age of 55. This will rise to 57 from 2028.
Most workplace pensions set an age when you can take your pension, usually between 60 and 65, 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.
Normally it’s best to hold off from accessing your workplace pension for as long as you can afford to do so – certainly until you’re no longer working full-time. This gives more time for your pension to grow and for further payments to be made into 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%.
If your pension is quite small you may be able to take it as a lump sum.
You can take 25% of your pension tax-free but you’ll pay Income Tax on the rest.
If you’re changing your employer or your current employer has a pension scheme, you should ask them to give you information about their workplace pension scheme.