Since 2012, employers in the UK have been required to provide a workplace pension for their qualifying workers.
A workplace pension is a way of saving for your retirement through contributions deducted directly from your wages, which are eligible for tax relief. Your employer may also make contributions to your pension through the scheme.
If you are a business owner and need more information on auto-enrolment, please visit corporate pensions.
Some workplace pensions are called ‘occupational’ or ‘company’ pensions. As an employee, you should get information about any workplace scheme you are entitled to join within two months of starting work.
Your employer will need to write you to once you’ve been enrolled into their workplace pension scheme. This should provide you with information about the scheme including how much your employer will contribute and how much you’ll need to pay in, as well as the type of pension scheme and who runs it.
Different types of workplace pension schemes have different benefits. It's important to understand the differences so that you can work out whether this is the most effective way for you to save for your retirement and what other options you may have.
The scheme that is set up for you by your employer is likely to be categorised in one of two ways:
- Defined benefit pension
- Defined contribution pension
Defined benefit pension
A defined benefit pension scheme (sometimes called a final salary or occupational pension scheme) provides a specific benefit, usually based on your pensionable earnings and the length of time that you have been a member of the scheme.
Each pension scheme is likely to define what is meant by your pensionable earnings, as this may not be the same amount as shown on your pay slip. Your employer will contribute to the scheme and is responsible for ensuring the scheme is sufficient to provide you with an income upon retirement.
You may also be required to contribute to the scheme, and be able to make additional voluntary contributions, too. These contributions may provide extra years of service, or a separate fund that adds further benefits to the already defined benefits. These schemes will provide tax relief at your marginal rate by reducing your taxable income through the pay-as-you-earn (PAYE) system.
Defined contribution pension
A defined contribution pension scheme (also known as a money purchase scheme) will invest the contributions made by you and your employer into a range of different investments. You may be offered a choice about how your contributions are invested, but when you are enrolled, a default fund will generally be selected for you by your employer.
The benefits available at retirement under this scheme will depend on how much you and your employer have contributed over the term of the scheme. However, as the funds are likely to be invested for many years, the benefits you receive will also be impacted by how the investments have performed over this period. It’s important to be very clear about the investments you select, or to ensure that the default fund is right for you.
Your employer is required to make monthly minimum payments into the pension, and if they choose to do so then you will also be required to make minimum payments. The payments you make qualify for income tax relief at your highest marginal rate. If you’re a higher (40%) or additional rate (45%) taxpayer, you may need to complete a self-assessment to claim additional relief.
If you opt out of this scheme then you may lose the value of the employer contribution, and it may not be offered through your salary as an alternative. Therefore, it can be viewed as a valuable personal benefit, which once paid, is yours and cannot be taken back.
The most suitable course of action is dependent upon individual circumstances and professional advice should be sought. Taxation is subject to change.
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