Workplace pension

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While most UK citizens are entitled to a state pension provided by the government, it’s a good idea to try and save more for your retirement by paying into other pension schemes, such as a workplace pension. Doing so allows you to save more and ensure a comfortable standard of living when you retire.

On this page, you’ll find out everything you need to know about workplace pensions, including how they work, the different types of schemes and the benefits of having a workplace pension. We also consider some of the other ways you can save for retirement, such as investing and opening a high-interest savings account.

Key takeaways
  • Retirement: Workplace pensions allow you to save money for retirement by making regular contributions directly from your salary

  • Employer contributions: If you automatically enrol into a workplace pension scheme, your employer may also make contributions on your behalf, and the government offers support by providing tax relief

  • Pension schemes: There are two main types of workplace pensions – defined benefit and defined contribution schemes

What is a workplace pension?

A workplace pension allows you to save money for your retirement by making pension contributions deducted directly from your salary. Your employer may also contribute to your pension through the workplace pension scheme, but they may only be obliged to make contributions if you automatically enrol in a workplace pension.

How do workplace pensions work?

When you’re in a workplace pension scheme, you’ll contribute a tax-free percentage of your pay into your pension automatically every payday. Most workplace pensions also require your employer to contribute a typically capped percentage into your pot. You also get support from the government in the form of tax relief, effectively enabling you to save more for your retirement.

Following changes introduced in April 2019, employees must contribute a minimum of 5% of their pensionable salary (of which 1% is tax relief from the government), while employers are required to contribute at least 3% (although they may choose to pay more).

What are the different types of workplace pensions?

There are two main types of workplace pensions, which are defined contribution and defined benefit.

Defined contribution workplace pensions

The most common workplace pension is a ‘defined contribution’. In this type of scheme, your pension pot size relies on how much you and your employer contribute. ‘Defined benefit’ is a workplace pension wherein your pension pot size depends on your salary and how long you’ve worked for your employer.

Defined contribution pensions can be either personal or stakeholder schemes, and are also known as money purchase pension schemes. Money paid into a defined contribution pension by you and your employer will be invested by your pension provider, for example, by buying shares. Because this pension type relies on shares, your pension’s value can go up or down, depending on how well the investments perform. Some pension scheme providers move your money into lower-risk investments as you get closer to your retirement age. You can get more information about the investments made by asking your pension provider.

How much you’ll receive when you retire will depend on how much money has been paid into your workplace pension scheme, how well the investments performed and whether you decide to take out your money in regular payments, lump sums or small sums.

Defined benefit workplace pensions

Your employer arranges defined benefit workplace pensions, which is sometimes called a final salary or career average pension schemes. How much you receive from your pension pot will depend on how much you’ve paid in. These types of workplace pensions can also consider other factors, such as your salary and how long you’ve worked for your employer.

Am I eligible for automatic enrolment into a workplace pension scheme?

All UK employers are required by law to offer a workplace pension scheme to employees eligible for automatic enrolment. You’ll automatically be enrolled into a workplace pension scheme if:

  • You’re aged 22 or over
  • You’re under the state pension age (currently age 66 for both men and women)

  • You earn more than £10,000 a year

  • You’re not enrolled in any other workplace pension scheme

  • You normally work in the UK

You can opt out of your employer’s workplace pension by completing a form and returning it to your employer. When you opt-out, your employer is still required to re-enrol you every three years, and you’ll need to opt-out each time if you don’t wish to save for your retirement through a workplace pension.

If you’re not eligible for automatic enrolment into a workplace pension scheme, you can usually join the scheme voluntarily. However, your employer does not have to contribute to the scheme if you earn less than:

  • £520 a month
  • £120 a week

  • £480 over four weeks.

What if I’ve already got a workplace pension?

There isn’t a limit on how many pension schemes you opt into, meaning you can join a workplace pension even if you’re already in one or contributing to another type of pension, such as a personal pension.

If you’re planning to opt into more than one type of pension, it’s important to know that you can afford the contributions. Our budget planner can help you decide.

An example of a workplace pension

Let’s look at a simplified example of a workplace pension. Let’s say you’re in a defined contribution pension scheme, and every payday you contribute £50, your employer contributes £40, and your tax relief is £10.

This total amount of £100 goes into your pension pot, and your pension provider invests it. When you retire, you’ll receive regular payments from your pension provider, which will include any extra returns earned on the investments they’ve made.

The benefits of workplace pensions

Some of the benefits of enrolling in a workplace pension scheme are the following:

  • A workplace pension helps make up the difference between earning a monthly salary and funding the retirement lifestyle you want
  • Your employer will also make contributions to your pension pot, alongside your contributions

  • The more you contribute, the bigger your pension pot and the bigger the payments you’ll receive when you retire

  • The government’s tax relief effectively means you’re contributing more into your pension pot

  • You can choose how you’ll use your pension pot once you reach retirement age

Am I taxed on my workplace pension?

The short answer is yes. While you can take 25% of your total pension tax-free when you reach age 55 or over, you’ll have to pay tax on any pension income over the personal allowance (£12,570 in 2024/25). The amount you’ll be taxed depends on the income tax band you fall into.

That means if you’re a basic-rate taxpayer, you’ll have to pay 20% tax on your pension. You’ll pay 40% if you’re a higher-rate taxpayer, and 45% if you’re an additional rate taxpayer. However, there are certain circumstances when you may be able to take all of your pension as a tax-free lump sum. This might be the case if you’re diagnosed with a serious illness and have less than a year to live. A financial adviser may also be able to help you mitigate the amount of your workplace pension that’s lost to tax.

Is my workplace pension protected?

How well your workplace pension is protected depends on the type of scheme you’re in. If you’re in a defined contribution pension scheme and your employer closes down, you won’t lose your pension because your pension provider is responsible for this type of scheme.

If your pension provider fails but is a UK-regulated insurer, you might be able to claim compensation from the Financial Services Compensation Scheme (FSCS). If the FSCS can pay compensation, you’ll be entitled to 100% of your pension pot, and there’s no limit.

In a defined benefit scheme, your employer is responsible for ensuring there’s enough money in the scheme to pay each member the promised amount. The Pension Protection Fund will protect your pension if your employer goes bankrupt and can’t pay your pension. The Pension Protection Fund will reimburse you 100% of your pension if you’ve reached the scheme’s pension age, and 90% if you’re below the pension age.

However, if you’re in a trust-based scheme under defined contribution pension and your employer closes down, you may not be eligible to claim your pension, because the running costs of this type of scheme come from member contributions.

What should I consider when taking out a workplace pension?

If you’re planning to join your workplace pension scheme, it’s a good idea to join as early as possible to achieve the maximum benefits from your contributions and increase your pension pot. The more you save now, the more you’ll receive when you retire. Some workplace pension schemes don’t allow you to join once you reach a certain age, – another reason to consider joining early.

You’ll also need to consider how financially stable you’ll be when you retire. The main benefits of workplace pensions are that your employer must make additional contributions on your behalf, and the government provides tax relief. If you want a steady income that won’t affect your lifestyle too much when you stop working, opting into a workplace pension might help you achieve that goal.

What happens to my workplace pension if I get a new job?

If you move jobs, your workplace pension still belongs to you. Even when you’re not making further contributions to a workplace pension through a previous employer, your money will remain invested, and you’ll still be able to access your pension when you reach the scheme’s pension age.

When you change jobs and meet the eligibility criteria, you’ll be offered a new workplace pension through your new employer. If you opt-in, you might be able to combine your old and new workplace pension schemes.

If you were employed for less than two years, you might be eligible for a refund on the amount you’ve contributed, or you may be able to transfer the value of its benefits to another scheme. However, these options will depend on individual schemes and their rules.

What happens to my workplace pension if I have to take leave?

What happens to your workplace pension if you take leave depends on the type of leave you take. If you take paid leave, you and your employer can continue making contributions to your pension pot. The amount you contribute depends on the pay you receive during your paid leave, and your employer will pay contributions based on the salary you would have received if you were not on leave. If you take unpaid leave, you could still make contributions, but you’ll have to check with your employer.

During maternity, paternity, adoption and shared parental leave, you and your employer will continue contributing to your pensions as if you still get paid during your leave. If you’re not getting paid, your employer is obliged to make contributions for the first 26 weeks of your leave. They’ll only have to carry on contributing to your pension after that time if stated in your employment contract.

What are my other pension options?

There are a couple of other pension options you might want to consider:

  1. You could take out a personal pension, another type of defined contribution pension. When you retire, you’ll receive a pension based on how much you’ve contributed, and you can either make regular or lump sum payments. It’s important to check that your pension provider is HM Revenue and Customs (HMRC) registered. If they’re not, you won’t receive any tax relief from the government.
  2. You may also be eligible to claim a state pension when you reach pension age. However, this is capped at £203.85 a week a week for 2023/24. It’s also important to note that you won’t receive this full amount if you haven’t worked enough National Insurance qualifying years. The number of qualifying years you need to claim a full state pension is 35, and the minimum qualifying years you’ll need to be eligible to claim your state pension is 10 years.

Are there other ways to save for retirement?

Paying into a workplace pension is a great way to save for your retirement, but it’s not the only one. If you’re looking for ways to make your money work hard for you, investing in the stock market might be an option. However, investing has risks involved that can lead to losing some or all of your investment value. If you’re uncomfortable with risk, it may be better to consider alternative strategies.

Opening an individual savings account (ISA) is another option, which can provide a more secure way of saving your money, but there’s a limit of £20,000 per year on how much you can invest. This limit can be a disadvantage if you want to save more for your retirement. Plus, most ISAs typically pay a lower interest rate than other types of accounts.

One of the safest ways to save for retirement is by opening a savings account, especially one which offers competitive interest rates. If you’re happy to lock away your money for a set period (typically between one year and five years, though shorter and longer terms may be available) you might want to consider a fixed rate bond. These types of accounts tend to offer the highest interest rates and can be a good way to maximise the return on your deposit. Plus, you won’t be at risk of losing your savings, as the FSCS protects deposits into savings accounts offered by UK-regulated banks.

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