Workplace pensions

What is a workplace pension?

A workplace, or company, pension scheme is a pension that’s arranged by your employer. It’s different from a private pension, which you choose and pay into yourself. Usually, you’ll be automatically enrolled into a workplace pension when you join a new company. Both you and your employer will make monthly contributions. It can be one of the simplest ways to put money away for retirement.

Who is eligible for a workplace pension?

Typically, to be able to join your workplace’s standard pension scheme and benefit from employer contributions, you must meet the following criteria:

• Aged between 16 and 74
• Earn more than £6,240 a year
• Work (mainly) in the UK and have a contract of employment (not a self-employed contractor); or have a contract to provide work and/or services personally (not sub-contracting to a third party).

If you are aged between 22 and state pension age and earn more than £10,000 per year, you will be regarded as an “eligible jobholder” and will be enrolled in your workplace scheme automatically. Those that fall outside of these thresholds (but who still meet the basic criteria in the bullets above) are dubbed “non-eligible jobholders”. Somewhat confusingly, this doesn’t mean you aren’t eligible to join the scheme (and benefit from employer contributions). It simply means that you aren’t automatically enrolled, and have to ask to join.

Do I have to be working full time for a workplace pension?

No. It doesn’t matter whether you are a part-time or full-time employee. As long as you meet the criteria outlined above, you can be enrolled in your employer’s pension scheme and benefit from its contributions to your pension. If you have more than one part time job for which you meet the eligibility criteria, this could mean you have more than one workplace pension.

Are any employees not able to enrol in their workplace pension?

If you are aged between 16 and 74, work in the UK for an employer, and earn less than the lower earnings amount (£6,240 a year), you can still ask to join a workplace pension scheme. However, it doesn’t have to be the same pension as employees that earn more than this amount. Your employer could arrange for you to be enrolled in a group personal pension (where your employer chooses the provider on behalf of employees, but the contract is between you and the pension provider), or another type of pension. Your employer doesn’t have to contribute to your pension, though it may choose to do so.

If you don’t meet even the criteria above (for example, if you’re older than 74, or mainly work abroad) you don’t have any rights to join a UK employer’s scheme. If this is the case, you can choose to save for retirement with a private pension.

What types of workplace pension are there?

There are 2 types of workplace pension: defined contribution schemes, which are now the most common type of workplace pension, and defined benefit pensions. The latter are becoming increasingly rare outside of the public sector.

What is a defined contribution pension?

With defined contribution (DC) pensions, the contributions to your pension pot are invested by the pension provider. They’re also known as money purchase schemes. The idea is that the investments will grow enough over time to provide a worthwhile return to help fund your retirement. Of course, investment performance is not guaranteed – nor is the value of your pension pot when you retire.

When the time comes to withdraw your pension savings, you can take the cash out (all at once, or gradually over time), leave most of it invested and take just enough for an income (income drawdown), or use it to buy an annuity. Unless you work in the private sector or, in some cases, for a large and well-established firm, anyone starting at a new company will almost certainly be enrolled in a defined contribution pension.

What is a defined benefit pension?

These pay out a fixed, regular income when you retire, based on a proportion of your salary when you were at the company. The percentage is calculated based on the years you’ve worked at a company. Outside of the public sector, defined benefit (DB) schemes are becoming increasingly rare. That’s because the company has full responsibility for ensuring there’s enough money in the pot to pay retired employees’ pension income. This is more expensive than DC pensions, where what you get at the end is down to the success of your pension investments.

Even if you joined a company on a DB scheme, many have moved or are moving employees over to DC schemes. If so, your pension with a single company may be split into 2 parts – an older DB scheme and a newer DC scheme.

There are 2 types of defined benefit scheme you might come across:

• Final salary pensions. With these, your income at retirement is based on a proportion of your final salary when you left the organisation.
• Career average pensions. These base your pension income on your average salary during your time with a company. Many public sector employers that used to offer final salary schemes, such as the Teachers’ Pension Scheme, have now moved to career average schemes.

Defined benefit or defined contribution: Which one is better?

Ask most pension experts which is better and most are likely to come down on the side of defined benefit pensions. Final salary pensions, in particular, are often referred to as “gold-plated” pensions. That’s because, unlike DC pensions, your income is guaranteed for life, and usually at a higher level than you can hope to achieve by saving into a defined contribution pension. Plus, your pension income payments are usually “index-linked”, which means that your income will rise each year to keep up with rising prices. Many will also pay a reduced level of income to any surviving spouse, partner or dependant when you die.

In short, if you have a defined benefit pension, it’s well worth hanging on to.

Do you pay tax on workplace pension contributions?

No! This is one of the biggest benefits of paying into a workplace pension, or indeed any pension. Subject a maximum annual allowance (usually £60,000, or the equivalent to your salary if this is lower), the money that the government would usually take in tax goes towards your pension pot instead. The tax relief you get is dependent on your rate of income tax.

For workplace pensions, this can work in 1 of 2 ways. Your employer chooses which method it uses.

• Net pay. Your employer takes your workplace pension contributions out of your gross pay, so before income tax is deducted. This means that you receive the full benefit of tax relief immediately, regardless of whether you’re a basic or higher-rate taxpayer. If you don’t earn enough to pay income tax, you won’t get any tax relief.
• Relief at source. Here, your pension contributions are made from your net pay (so after they’ve been taxed). Your pension provider claims 20% (the basic rate) in tax relief from the government and adds it to your pension pot. If you are a higher-rate taxpayer, you’ll need to claim back the extra via a tax return (if you complete one) or directly from HMRC. Under this arrangement, even people that don’t earn enough to pay tax will still benefit from tax relief at 20%.

What are the advantages of saving into a workplace pension?

One of the biggies is that tax relief we just mentioned. A pension is pretty much the only saving vessel that benefits from such generous tax breaks. ISAs, too, have tax benefits – but just that you don’t pay tax on any interest earned. You’ll still typically have paid tax on the money you put in to start with.

Other advantages of saving into a workplace pension include:

• It provides a boost to your pension savings above and beyond what you’ll get from the state pension. The state pension is currently worth less than £10,000 a year. That’s probably not enough to let you properly enjoy your golden years.
• Employer contributions. Unless you earn less than the lower earnings limit (£6,240 a year for 2021–22), your employer also has to contribute to your pension. That’s basically free money that you wouldn’t get otherwise.
• Because your contributions are invested (potentially for decades), the return on your investment into a defined contribution scheme will be much better than putting the same money into a cash savings account. And if your company still offers a defined benefit pension, this can be even more valuable.

How much must I and my employer pay into a workplace pension?

If you’ve joined your pension under the government’s pension auto-enrolment policy either automatically or because you’ve requested to join, there are rules on the minimum amounts that you and your employer must contribute based on what’s known as your “qualifying earnings” (your pre-tax earnings of between £6,240 and £50,270 a year, as of the 2021–22 tax year). These contributions must usually add up to 8% of your qualifying earnings, broken down as follows.

In some cases, your employer may choose to contribute a higher percentage. If so, you may be able to contribute a lower amount, provided that the total adds up to 8%.

With some schemes, in particularly defined benefit schemes, contribution levels by both you and your employer may be higher.

If you earn less than the minimum earnings threshold of £6,240 a year for 2021–22, your employer doesn’t have to contribute anything to your pension (though it may still choose to). You’re likely to have more say over how much you contribute.

Can I pay extra into my workplace pension?

In most cases, yes, though how much more will depend on the terms of your workplace scheme. Speak to your employer to find out what is possible. In some cases, your employer may increase its own contributions if you pay extra in yourself. Bear in mind that if you build up more than £60,000 a year across all of your pension pots (or the equivalent of your annual earnings, if this is lower), any excess won’t benefit from tax relief.

Who manages my workplace pension?

Workplace pensions are run by employers. While your employer will use an underlying pension scheme provider to manage the investment of their employees’ pension savings, an employee’s pension relationship will almost always be directly with their employer. You shouldn’t ever need to contact the organisation that manages the investments.

There may be an exception to this rule if you don’t meet the criteria for enrolment in your employer’s main pension scheme, and it has set you up in a group personal pension or stakeholder pension scheme that it’s arranged. In this case, you will have an individual contract with the pension provider.

Finder survey: Do you know what industries/types of companies your workplace pension is invested in?

How can I open a workplace pension?

Most employees will be automatically enrolled into their workplace pension when they join the company. If you don’t meet the automatic enrolment criteria but still want to join a workplace scheme, or if you initially opt out and then later decide you want to join, just let your employer know and it should set the ball rolling.

Can I opt out of a workplace pension?

Unless they earn below £10,000 a year, the vast majority of new employees will be automatically enrolled into their workplace pension. You can opt out after you’ve been enrolled, though by doing so you’ll miss out on your employer’s contributions and the benefits of tax relief. You’ll need to fill in an opt-out form to return to your employer. You can opt out at any point. After the first month, any payments you’ve already made will stay in the scheme (rather than being refunded).

By law, your employer must re-enrol you back into the scheme roughly every 3 years, provided you meet the eligibility criteria. If you still don’t want to be part of the pension scheme, you’ll have to opt out each time you’re re-enrolled.

What if I’ve already got a pension?

That’s not a problem. Even if you already have a pension scheme, with another employer or a personal pension provider, you can still join a workplace scheme with a new employer. There are no limits on how many pension schemes you can have and pay into at the same time. However, you can only benefit from tax relief on up to £60,000 a year (or the maximum of your annual earnings) across all of your schemes.

Can I have multiple workplace pensions?

Yes. In fact, not only can you have more than one workplace pension, but if you move jobs over your lifetime, it’s almost inevitable. In most cases, though, you’ll only be actively contributing to a single workplace pension at a time. If you have a defined contribution workplace pension, you also have the option of transferring the pension from a previous employer into your new employer’s scheme. This can help you avoid building up lots of pots that are harder to keep track of.

Before you automatically follow this route, though, you’ll want to make sure that your new employer’s scheme doesn’t have much higher charges than your previous scheme, which might reduce the benefit. And if you have a defined benefit scheme with a former employer, it’s almost certainly best left where it is.

What if I have multiple jobs?

If you have multiple jobs, and you earn enough with each of them to qualify for a pension, you may have workplace pensions with multiple employers at the same time. This is the exception to the rule we mentioned above that you typically won’t be paying into more than one workplace scheme at the same time.

What happens to my workplace pension if I change jobs?

If you move to a new company, then the money paid into your workplace pension by the time you leave is still yours. However, neither you nor your employer have to make any further contributions. You can leave your money in your previous employer’s scheme, consolidate it with other existing pensions, or transfer it to a new provider. If you have a defined benefit scheme, it’s usually best to leave it where it is, as to move it you’d have to convert it into a defined contribution pension.

Make sure you keep hold of the details to log into your account and keep your details updated. In particular, let the provider know if you move house so that you carry on receiving your annual pension statements. If you have lots of different defined contribution workplace pension pots, it could be worth consolidating them into a single pot.

What happens to my workplace pension when I retire?

If you have a defined contribution pension, nothing will happen automatically when you retire. Your pension will stay invested, and hopefully continue growing, until you take active steps to access it. This could be when you officially stop working and consider yourself retired. But as long as you’ve reached the minimum access age, you can also start taking it before you fully retire. You might want to do this if, for example, you want to move to part-time working, but need to bolster your employment income with your pension savings. You can also leave your pot where it is until you need it after retirement – for example, if you have other sources of income to make use of first.

If you have a defined benefit pension, check the terms of the scheme to find out what will happen and when. Most defined benefit schemes have a certain age at which they start paying out, regardless of your actual retirement date. You may be able to defer this (up to a point). If you do, your income may be higher when you do start taking it.

When can I access my workplace pension?

• If you have a defined contribution pension, you can usually start withdrawing money from the age of 55. This is due to increase to 57 from 2028.
• If you have a defined benefit pension, you’ll start receiving an income by default at an age that’s set by the scheme. This could be 60, 65 or state pension age, depending on the scheme. In some cases, you may be able to start receiving income earlier than your scheme’s default age (though not before age 55). But, if you do, you can expect a significant reduction in your annual pension payments that may seem disproportionate to the number of years early you’ve taken it. So it’s probably worth avoiding this route if you can.

How do you receive money from a workplace pension?

With both defined contribution and defined benefit pensions, you’re entitled to take 25% of their value as a tax-free lump sum. With defined contribution schemes, this is relatively simple. You just take a quarter of the value of your pot. With defined benefit pensions, it’s possible but a bit more complicated. You’ll need to ask your provider how much you can take, and by how much it will reduce your annual income.

Speaking of which, how you receive the remaining money from a workplace pension also depends on the type of scheme. Any money you receive above and beyond the 25% tax-free lump sum is subject to income tax.

How you receive money from defined benefit pensions

You receive money from a defined benefit schemes as a regular, guaranteed, pre-agreed income that’s based on a proportion of your salary while you were working. The amount may be reduced if you’ve taken a tax-free lump sum. You receive the income for life, it’s usually index-linked to keep up with price rises, and your partner or dependants may be entitled to a partial income after you die.

How you receive money from defined contribution pensions

How you can access money from a defined contribution pension pot is much more flexible. You have the choice of:

• Buying an annuity to give you a regular income – though this is likely to be much lower than equivalent contributions into a defined benefit pension would have got you.
• Taking out an income drawdown scheme, which keeps most of your money invested, allowing you to draw out a regular income or ad hoc amounts as needed.
• Leaving the money invested in the original scheme, taking out lump sums gradually over time.
• Withdrawing the full lot at once.

You can use one of these options, or mix and match a few of them. You can read more about your choices in our guide to defined contribution pensions.

Bottom line

Paying into a workplace pension is almost invariably one of the best ways to save for the future. While retirement may seem a long way away, you don’t want to end up short-changed in later life. If you have the chance to join a defined benefit scheme, seize it with both hands. But even defined contribution workplace pensions are well worth having thanks to the the double whammy benefit of tax relief plus employer contributions.

Frequently asked questions

• What is pension auto-enrolment?

  Auto-enrolment is a scheme set up by the government in 2012 that aims to make sure that people contribute to their pensions. The auto-enrolment rules mean employers are legally obliged to offer employees a pension scheme, which they must also pay into. If you take no action to opt out, you’ll be automatically enrolled in an employer’s scheme when you join a new company. Hence the name. You can choose to opt out if you wish, but your employer is obliged to re-enrol you approximately every 3 years. If you still don’t want to be part of the scheme, you’ll need to proactively opt out every time.

• What is the pension annual allowance?

  The annual allowance is a limit on how much you can build towards your pension each year that benefits from tax relief. For most people, the annual allowance is either £60,000 or the equivalent of their annual earnings, if this is lower. For defined contribution pensions, this is based on total contributions by you, your employer, or anyone else. For defined benefit pensions, it’s based on the capital value of the increase in your pension benefits over the tax year. You can ask your provider for this information. If you’re a very high earner (we’re talking £200,000 plus a year) or you’ve already started drawing money out of your pension, your annual allowance may be lower.

• Can I choose my own workplace pension provider?

  No. Your employer chooses the pension provider that you’ll be enrolled with. It will usually have negotiated preferential terms and rates with the provider in exchange for enrolling a number of employees. You can, of course, choose to opt out of your employer’s scheme and take out a personal pension of your choice. But charges are likely to be higher with personal pensions than workplace pensions, and you won’t benefit from employer contributions, so it’s probably not the best choice.

• Does a workplace pension affect your state pension?

  No. Workplace pensions are entirely separate from your state pension entitlement. Your state pension entitlement is built up over time by making National Insurance contributions. Having a workplace pension will not affect your state pension.

• Will my company pension reduce when I receive my state pension?

  No. Just as a workplace pension won’t affect your state pension entitlement, starting to receive your state pension won’t automatically trigger any changes to your workplace pension income. However, if you are taking income flexibly from your workplace pension pot (known as pension income drawdown), you may choose to reduce the amount you withdraw if you no longer need as much, or if receiving your state pension pushes you into a higher tax bracket.

• Is a workplace pension worth it?

  Almost certainly. The tax breaks and employer contributions make workplace pensions a fantastic way of saving for the future. We’re not suggesting you render yourself destitute right now in order to contribute to your workplace pension. But if you can find a way to afford it, it’s a really good idea.

• How much will my workplace pension be worth when I retire?

  Your employer should send you annual statements that indicate how much your pension is worth. For defined benefit pensions, this will be the income you could expect if you started taking your pension straight away. It won’t take account of future index-linked increases. For defined contribution pensions, it’ll be based on the current value of your pot. If you want to get a sense of how much you might get based on making certain contributions over your lifetime, MoneyHelper – the government-backed money advice website – has a helpful pension calculator.

• Does saving into a workplace pension affect my lifetime allowance?

  Yes. The pension lifetime allowance is the total amount you can build up in all your pension savings by the time you take money from the pot, without incurring an extra tax bill. The allowance is pretty high (more than £1 million). So, most people won’t need to worry unduly about hitting this cap.

• Should I transfer a defined benefit workplace pension into a defined contribution pension?

  Probably not. If you have a final salary (or defined benefit) scheme, it’s usually best to leave it where it is. Final salary schemes are referred to as gold-plated for a reason. For most people, defined benefit schemes are well worth keeping hold of. The only exception might be if you have a very short life expectancy. In this scenario, you might decide you’d benefit more from immediate access to a pot of money than you would from a lifetime of guaranteed income.

• What is a transfer out fee?

  A transfer out fee is a charge applied by some pension providers for transferring your pot from one scheme to another. If you’re thinking of consolidating a previous workplace pension into your new employer’s scheme, for example, it’s worth checking for these charges, which might eliminate some of the benefit.

Written by

Ceri Stanaway

Writer

Ceri Stanaway is a researcher, writer and editor with more than 15 years’ experience, including a long stint at independent publisher Which?. She’s helped people find the best products and services, and avoid the pitfalls, across topics ranging from broadband to insurance. Outside of work, you can often find her sampling the fares in local cafes. See full bio