What are workplace pensions, what are the benefits and am I eligible for one?

1st November 2018

For more information, book a call with us

If retirement is something you haven’t given a minute’s thought to, or even if it’s right at the forefront of your mind, either way you should want to know more about workplace pensions.

You may be at a stage in your life when retirement seems so far away that it’s one of those things you will ‘look at a bit later’.

But it’s really something you want to address now. Why put it off until a later date when the sooner you act now, the better it will be for you in the long term?

On the other hand, the ‘R Word’ may be looming all too ever closely, and you’re already thinking about life after work, what you’ll do, how you’ll survive financially.

You may already have personal pension plans and are safe in the knowledge that you’ll be able to provide yourself a decent standard of living once you clock off at work for the final time. If so, then you’re already in a good place.

Most people will get a state pension from the government, but it’s important to understand that employers now offer access to a pension at work – and that joining it can be one of the simplest ways to save for your retirement.

What is a workplace pension?

A workplace pension is arranged by your employer as a means of saving for your retirement.

A percentage of your pay is automatically put into the pension scheme every pay day and, in most cases, your employer will also add money into your pension scheme.

As of 2018, all employers now have to automatically enrol their eligible workers into a workplace pension. It is called automatic enrolment.

There are two types of workplace pension schemes:

  • Occupational pensions
  • Group personal pensions or stakeholder pensions

What are occupational pensions?

There are two types of occupational pensions – final salary schemes and money purchase schemes.

Final salary scheme

A final salary scheme normally offers you an income in retirement based on a proportion of your final salary – your pension is linked to your salary while you’re working, so it automatically increases as your pay rises.

Your pension is based on your pay at retirement and the number of years you have been in the scheme, although it’s important to understand that ‘final salary’ doesn’t necessarily mean the actual salary that you’re earning at the time you retire.

However, final salary schemes are much rarer these days and many employers will no longer offer them.

Money purchase schemes

Also often called defined contribution schemes, the pension benefits at retirement are determined by agreed levels of contributions paid into the fund by the member and employer.

They provide benefits based upon the money held in individual ‘pots’, and the amount in your ‘pot’ at retirement will depend upon the investment returns achieved on the member and employer contributions.

The benefits of occupational pension schemes are:

  • Life insurance which pays a lump sum or pension to your dependants if you die while still employed
  • A pension if you have to retire early because of ill-health
  • Pensions for your spouse, civil partner and other dependants when you die

What are group personal pensions or stakeholder pensions?

Group personal pensions and stakeholder pensions are very similar to the personal pensions which you can arrange for yourself, and may be the option if you are not eligible to automatically enrol into your workplace pension.

Your employer chooses the pension provider but you will have your own contract with the pension provider.

You pay contributions into your pension fund direct from your wages, and the money is invested to grow your fund which you use to provide you with a pension when you retire.

What are the benefits of a workplace pension?

To put it simply, it is the easiest way to start saving for your retirement.

Thanks to automatic enrolment, most employees are signed up straight away and, if they no longer want to pay in, it is up to them to opt out.

One of the huge advantages is that you are not just paying into the pension fund – your employer pays into it as well and you will get tax relief from the government.

The money automatically comes out of your salary on pay day, so it becomes like any other regular expense. You don’t have to lift a finger.

What is auto-enrolment?

As of 2012, all employers must provide a workplace pension scheme, and your employer must automatically enrol you into a pension scheme and make contributions to your pension if all of the following apply:

  • You are classed as a ‘worker’
  • You are aged between 22 and the State Pension age
  • You earn at least £10,000 per year
  • £833 per calendar month
  • or £192.00 per week
  • You work in the UK

If you do not get information about any workplace scheme you are entitled to join, you should contact your manager or HR department.

What happens when you are automatically enrolled?

  • When you have been automatically enrolled into a workplace pension scheme, your employer will write to you with the following information:
  • The date you were added to the pension scheme
  • The type of pension scheme and who runs it
  • How much your employer will contribute and how much you will have to pay in
  • How to leave the scheme, should you want to
  • How tax relief applies to you

How much do I pay into my workplace pension?

As of April 2019, the total minimum contribution will be 8%, which is broken down into 5% from you and 3% from your employer.

Until then, and as of April 2018, the total minimum contribution is 5%, which is broken down into 3% from you and 2% from your employer.

These amounts could be higher for you or your employer because of your pension scheme rules. They’re higher for most defined benefit pension schemes.

What happens if I change jobs?

The days of remaining in one job for the duration of your working career are mostly a thing of the past, so it is more than likely that at some stage you could switch from your current employer to a new one.

If that does happen, there may be several options available to you:

  • Continue making contributions to your previous pension
  • Leave you pension behind in your old employer’s scheme to be paid to you when you retire
  • Combine your old and new pensions
  • Transfer to a new occupational scheme
  • Transfer to a personal pension

It can be difficult to decide what is the best course of action, so we would strongly suggest speaking to one of our advisors, who will be able to go through your options in greater detail.

What if I become self-employed or stop working?

Should you become self-employed or stop working, you may be able to carry on contributing to your workplace pension – but you would have to ask the scheme provider.

There is no workplace pension scheme available to self-employed people, but you could look into using the National Employment Saving Trust (NEST), which is a workplace pension scheme that working self-employed people can use.

I want some further advice on workplace pensions

Many of our clients are coming to the end of the first three-year anniversary of auto enrolment and will need to reassess and submit a re-declaration to the Pension Regulator, so workplace pensions are something we are very much involved in at the moment.

If you’d like our help or wish to discuss workplace pensions further, please fill in your details below and one of the team will be in touch. Alternatively, give us a call on 0333 200 0714.

    Would you like to take a fresh approach to your accounts?