Workplace pensions, sometimes referred to as company pensions, are a way for employees to save for their retirement by contributing to a scheme constructed by their employer. They work by taking a percentage of income from each salary. Under new laws these schemes are automatically set up for all eligible employees.
Your employer must provide a workplace pension scheme and you will have to opt out if you do not wish to contribute. You are eligible if you are over the age of 22, work within the United Kingdom and earn in excess of £10,000 per year.
The pension itself has three contributors, yourself, your employer and the government. You are entitled to tax relief if you pay income tax but should you not, depending on the scheme itself, you may still be eligible for financial assistance.
The value of each payment from each source will depend on a number of factors, including:
- The design of the pension itself
- Whether you are automatically enrolled or you have a separate pension scheme
- Tax brackets
Each payment is typically worked out on a percentage basis and will depend whether the scheme is workplace defined or standard. Most workplace defined pension schemes require higher contributions than standard structured workplace pensions.
You may pay more into the scheme than is recommended and, as long as your employer agrees to contribute the difference, less for others.
All pensions define the minimum age at which they can be accessed and are typically first made available between 60 and 65 years of age. Depending on the small print of the scheme, some may even make payments available at 55, but this will reduce the value of the payments you receive.
Pros and Cons
The obvious drawback of contributing to a workplace pension is reduced income. This can be significant depending on the scheme your employer has put in place. What’s more, because your workplace designs and puts in the place the scheme, you have little or no influence over it.
However, as previously mentioned, there are a number of ways in which you can access financial help, including tax breaks, income related benefits and even reductions on student loans if you have them, so most will not see a marked change in their income.
The main benefit of the workplace pension scheme is of course securing your financial future well into your retirement years in an affordable and sustainable way.
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The rules regarding state pensions have recently changed also, although they are in principle the same. For men you will need to be 65 before you can access it and for women 63 as of April that year.
State pensions are eligible for those with other pension schemes, whether they are personal or workplace, and you can continue to work after accessing it. What’s more, you need not continue to pay national insurance contributions.
There are some reasons in which a workplace pension is not suitable, however. Those in financial difficulty may find it a luxury they can ill afford, while those close to retirement age will see little benefit in being signed up to it. For most though, it is recommended.
Not everyone is able to access the full state pension, which has been £155.65 per week since April 2016, but it can be higher or lower depending on your NI contributions. You will need to have worked and contributed for 10 years to national insurance. If you have worked abroad you may still be eligible for the state pension in the UK.
You may also defer your state pension until such time that suits you and this might mean higher payments when you eventually decide to access it.