Several types of workplace pensions

How does my workplace pension work?

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A workplace or occupational pension, as the name suggests, is savings for your retirement that is arranged by your then employer.

Generally, a pension is a tax-efficient way of saving money for when you decide to stop working and retire. It is essential and fundamental. 

There's quite a lot of information packed into this topic, but with this short guide you'll be able to understand exactly what a workplace pension is and how it works.

Types of workplace pensions

There are several types of pensions that can be arranged by your employer such as:

  • the auto-enrolment pension scheme
  • the group personal pension (GPP) or workplace personal pension
  • the stakeholder pension.

Most people get auto-enrolled into a pension scheme, while it is not uncommon to have a personal pension pot under your employer's pension provider.

Auto-enrolment pension.

In the UK, it is the law for your employer to auto-enrol you to the company's pension scheme if you qualify for it.

To qualify for it you need to:

  • be at least 22 but under State Pension age
  • earn more than £10,000 per year
  • work in the UK
  • not already be auto-enrolled in another workplace pension.

If you don't qualify to be enrolled l into the company's scheme yet, you can request to join it. Your employer is unable to refuse this request. However, they can refuse to contribute to your pension if you're earning under £6,240 per year, as of 2021/22.

Group Personal Pension (“GPP”)

This type of pension is a personal pot under your employer's pension provider. It is an individual contract and you don't choose your pension provider as you join your company's pension scheme. It is a mix of a personal pension and a workplace one. This option is not ideal for those who want to control how their pension is being invested.

In this pot, since it is also a personal account, contributions can be made by many people such as your employer, your family or your spouse, and your funds are invested for you for a potentially high retirement income.

Stakeholder pension

Your employer can arrange for you to join a stakeholder pension scheme as well as arrange for you to pay into it from your salary. This type of pension is a mixture of a personal and a workplace pension since you have a bit more freedom in terms of contributions and you join your employer's pension provider.

The difference with the other types is that you can make low contributions and follow a default investment strategy.

 

Contributions

How you contribute into your workplace pension depends on whether it is one of two schemes:

  • a defined benefit pension scheme; or
  • a defined contribution pension scheme.

The amount you will receive once you reach retirement age, based on a defined benefit pension scheme, relies on:

  • your final salary 
  • or on an average of your salary throughout your career, and consequently contributed to your pension. 
  • It also depends on the amount of years you've worked for this employer - the longer you have worked for them the more pension you'll get, 
  • and on the accrual rate, which is a pension interest rate you're paid under a certain pension scheme.

This way of securing a pension is quite rare these days as employers tend to favour a defined contribution scheme. 

On the other hand, on a defined contribution pension scheme your retirement is calculated according to the amount of contributions you've made over the years into your pension pot with that employer and how well these funds grew after being invested. It is the most well-known way of paying into your pension and growing your life savings.

It is worth noting that, as with most investments, their value could go up or down, with some risk involved.

How much do I have to pay in my pension?

Specifically, in an auto-enrolled pension scheme the minimum amount of total contributions should be 8%. Usually, the employer will contribute the minimum 3% and the rest 5% by yourself.

In a GPP, when contributions are made by you, you agree on the amount with your pension provider, a considerably more flexible approach to saving. Your family, spouse and employer can also make payments into this personal pot. 

Contributions in a stakeholder pension are usually paid by you as the rules are defined by the Government, unless it is an auto-enrolled scheme where a total of 8% has to be paid in, as explained above.

Tax relief

The Government likes to reward those who save for a pension. This is because the State Pension alone is not adequate for any UK citizen for a comfortable retirement, as it covers the basics. You usually get tax relief in the form of a top-up once you start receiving your retirement income and there's two ways you get it.

  • Your employer deducts tax as usual from your salary. Pension contributions are then made on your after-tax pay. Subsequently, your pension provider claims 20% tax relief, which is added to your pension income once you start receiving it.
  • Your employer deducts your pension contributions before deducting tax. You then pay tax on your earnings after deducting the pension. This means that you'll pay less tax since your earnings are lower, and you get tax relief instantly by paying less tax. This is also known as a Salary Sacrifice or Salary Exchange.

Your pension contributions are taken straight out of your salary, untaxed. You are also able to withdraw 25% lump sum out of your pension pot tax-free - however, with the rest of it getting taxed after you start receiving it.

When can I withdraw my pension?

Currently, once you reach 55, you can start receiving your pension or you can continue working and contributing to your pension until you decide you want to stop working. Most continue working until 60 to 65.

The minimum age you can take your benefits is meant to increase to 57 in 2028.

What happens to my pension pot if I change jobs?

Your pension money stays behind with your previous pension provider. This is how people often lose track of their pension pots and their whereabouts, as they forget that:

  • you need to update your pension provider every time you change address
  • your workplace pension does not follow you to your next job.

Each pension you arrange with each employer is unique and one pension pot on its own. You can either keep track of all your pensions if you've changed quite a few jobs in the past, transfer your pensions to your latest provider - depending that your pension providers allow it and that it is the best option for you - or use a pension tracing service like Raindrop.

Raindrop's service can find all your pension pots and help you to consolidate them all in one dashboard. This way you stay in control of your finances and aware of your savings' whereabouts.

 

How does a workplace pension work when I'm self-employed?

Self-employed people, unfortunately, don't have a workplace pension as they don't work for a company and they are not able to join in on the company's pension scheme. They work for themselves, so they are not entitled to a workplace pension.

As an alternative, if you're self-employed, you can arrange a personal or stakeholder pension with a provider and save for your retirement as you would do if employed by a company. You get the same benefits, such as tax-relief.

Raindrop offers a fully digital and easy to use personal pension which you can set up for yourself in 10 minutes. There are no minimum contributions and you can choose to contribute personally or via your limited company. It is well suited for someone who is self-employed and/or employed and looking to make flexible pension contributions. Click here to learn more.

 

Start planning your retirement today

As soon as you start saving for your pension, the better. When you join a new employer, ask to join their pension scheme. But always remember that your pension doesn’t follow you when you change jobs.

Don't postpone arranging a pension pot today and preventing you from having a comfortable living in the future.

Click here to see how Raindrop can help you plan your retirement.

Please note that the value of your pension can go up as well as down. As with all investments, your capital is at risk. Tax treatment depends on an individual’s circumstances and may be subject to change in the future. 

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