Workplace pensions explained
Workplace pensions provide an easy and straightforward way for you to save for retirement.
Find out more about how workplace pensions work and how you can use yours to boost your standard of living when you eventually hang up your boots and retire.
What is a workplace pension?
A workplace pension is a pension offered to you by your employer. They make retirement saving simple by deducting your pension contributions – at an agreed level – direct from your salary. This spares you the hassle of finding and setting up a personal pension yourself.
You might also hear them referred to as a company pension or occupational pension.
By law, all employers, must offer eligible staff access to a workplace pension and make contributions on their behalf too.
Workplace pension rules mean if you’re eligible you will be signed up to the scheme automatically, but you can opt out if you wish. This is called auto-enrolment.
In addition to employer contributions you’ll also get tax relief on payments into your pension. This is equivalent to the rate of income tax you pay and it effectively means basic rate taxpayers only need to pay £80 to invest £100, while higher rate taxpayers only have to stump up £60 to invest the same amount. Think of it as a rebate of the tax you’d have paid on that income, had you not paid it into your pension.
What types of workplace pension are there?
Workplace pensions broadly fall into two types: defined contribution and defined benefit.
This is the most common type of work pension. Here you and your employer pay into a pension and that money is invested on your behalf. How big your pension is when you retire will be down to the amount you pay in and the investment growth (less charges). It will then be your responsibility to decide how you will use that pot of money to pay you an income in retirement.
Your defined contribution scheme could be a group personal pension arranged by your employer, where you have an individual ‘pot’ or account run by a life insurance company. Or, you might be part of master trust arrangement. Here you’ll be joining a larger pension scheme used by multiple businesses. You might hear master trusts referred to as multi-employer pension schemes.
NEST is the master trust scheme set up by the government.
These company pension schemes pay you a guaranteed income in retirement, based on your salary, the accrual rate and your length of time in the scheme. Career average and final salary schemes are both types of defined benefit pensions.
You may well have a defined benefit pension if you work in the public sector, but the costs of running them mean they’re becoming increasingly rare in the private sector.
Who is eligible for a workplace pension?
Workplace pension rules (auto-enrolment) mean your employer must sign you up to its workplace pension if you meet all of the following criteria:
• You are between the ages of 22 and state pension age
• You earn £10,000
• You normally work in the UK
Even if you don’t meet this criteria your employer would normally allow you to join the pension scheme if you wanted to.
How much do I need to pay into my workplace pension?
Auto-enrolment rules also set down minimum contributions for workplace pensions.
Currently the minimum contribution is 8% of your qualifying earnings. This is made up of 5% from yourself and 3% from your employer.
It’s important to note that qualifying earnings doesn’t mean all your earnings. Qualifying earnings is the range between lower and upper limits that are set by the government each year.
For the current year (2023/24) that’s between £6,240 and £50,270 which means the maximum earnings your pension contribution can be based on is £44,030.
It’s also important to note that these are just ‘minimum’ contributions – do not assume that they are set at a level that will give you a comfortable income when you retire.
Your employer will allow you to increase your contributions and it’s a good idea to save as much as you can afford each month. Only paying the minimum could leave you with a disappointing retirement income.
Some employers will also pay more than 3% of your qualifying earnings into your pension too. This is because employer pension contributions can be a good way of attracting and retaining the best staff.
Approaches will vary between businesses but they may pay a proportion of all your earnings or match what you pay into your pension.
Where will my workplace pension be invested?
Your pension will likely be invested in portfolio of investments. Your money will normally be invested in the scheme’s default fund which will be made up of a stocks and shares as well as other lower-risk asset classes including fixed-interest securities (like corporate and government bonds) and cash. The risk profile of these funds may reduce as you get closer to retirement – a process known as life-styling.
These funds are very much ‘one size fits all’. Depending on the scheme, you may also get the opportunity to decide which funds your work pension invests in. This can be helpful if you want to take more control of your pension fund’s performance or you have a higher tolerance for risk.
In a defined benefit pension investments will be managed by the scheme administrator, but this will be less of a concern for members because their retirement income is guaranteed.
What happens to my workplace pension if I change jobs?
When you change jobs you’ll stop paying contributions into your old workplace pension and likely start paying into a new one.
Your older pension won’t close. Instead it will remain invested and you’ll be able to access it when you reach the required age.
If you end up changing jobs regularly you could end up with quite a collection of workplace pensions that you are no longer paying into.
It’s important not to forget about these pensions and, if you move house, make sure you give all the providers your new address.
You might in time, find it easier to consolidate all your old pensions into one, easier to manage pot.
When can I access my workplace pension?
If you have a defined contribution pension you can start taking lump sums or income from it once you turn 55. But, unless you have an urgent need for money, it’s normally recommended that you wait until you retire before you start taking money from it.
If you take out too much while you’re still earning, you may not have enough to live on once you have retired.
With a defined benefit pension the rules are slightly different. Your scheme will likely have a specified retirement age usually between 60 and 65.
You might be able to retire from age 55 but you’ll get a reduced income if that’s below the normal retirement age for the scheme.
Can I have a personal pension and a workplace pension?
Although there are limits to the amount you can pay into pensions, there’s no limit to the number of pensions you can have.
There are a number of reasons why you might want a personal pension, such as a SIPP, in addition to your workplace pension:
- You might want to pay into a pension that offers greater investment choice – for example funds, investment trusts, shares and ETFs
- You might want to pay into your current workplace pension but consolidate old workplace pensions into one, separate, pot
- If you’re in a DB scheme you may want to supplement your retirement income by contributing into a personal DC scheme as well
I’ve got a SIPP already, do I need to pay into my workplace pension?
Your SIPP might offer greater investment choice than your workplace pension and be easier to manage.
However, it’s still a good idea to pay something into a workplace pension, otherwise you’ll miss out on employer pension contributions. This would be like saying no to a pay rise.
Can I leave my workplace pension to my family?
This depends on whether you have a defined contribution or defined benefit pension.
With defined contribution you can pass your workplace pension (or a personal pension) onto your loved ones when you die.
This money will normally be paid free of inheritance tax. If you die before the age of 75 it will also be free of income tax.
You can tell your pension provider who you want the money to go to by completing an expression of wishes or nomination form.
If you have a defined benefit pension, there’s no pot of cash that can be passed on to beneficiaries. But, if you die, it may carry on paying a dependent’s pension to beneficiaries including your spouse or children if they’re still in full-time education. This will vary between schemes, so check the exact rules for yours with the scheme administrator.
Will I get the state pension if I also pay into a workplace pension?
Paying into a workplace pension won’t affect your entitlement to claim the state pension.
Eligibility for the state pension is linked to your National Insurance payments.
To claim the full state pension you simply need 35 years of National Insurance contributions or credits. If you have paid less than 35 years, but more than 10, you’ll get a proportional amount of state pension. If you have less than 10 years of NI contributions you won’t get any state pension.
What can I do if I have lost track of previous workplace pensions?
It’s all too easy to lose track of old workplace pensions, particularly if you move house and don’t pass your new address onto your provider.
Thankfully it shouldn’t be too difficult to track down lost pensions, so long as you have a few basic details. You can find out about how to find and trace pensions here.
How can Pension Wise help?
If you have a defined contribution pension scheme and are 50 or over, then you can access free, impartial guidance on your pension options by booking a face to face or telephone appointment with Pension Wise, a service from MoneyHelper.
If you are under 50, you can still access free, impartial help and information about your pensions from MoneyHelper.
Learn more about our SIPP
Learn how to make the most of your SIPP with our useful guides.
Please remember, SIPPs are aimed at people happy to make their own investment decisions. Investment value can go up or down and you could get back less than you invest. You can normally only access the money from age 55 (57 from 2028). We recommend seeking advice from a suitably qualified financial advisor before making any decisions. Pension and tax rules depend on your circumstances and may change in future.