Why is this important?
Table of contents
- About workplace pension schemes
- What is a workplace pension scheme
- Occupational pensions
- Automatic enrolment into a workplace pension
- Group personal pensions and stakeholder pensions through your workplace
- Finding out about your workplace pension scheme
- When should you join the workplace pension scheme
- What if you've already got a pension
- What happens if you change jobs
- Opting out of the additional State Pension
- What if your employer doesn't yet offer a pension
- Further help and information
A pension is money you'll use to live on when you retire. Most people get a state pension from the government which covers your basic needs. But it's also a good idea to try and save some extra money in a pension fund, to give you a decent standard of living.
Most employers now offer access to a pension at work and joining it can be one of the easiest ways to save for your retirement.
Employers who don't yet offer workplace pensions will have to do so over the next few years. Starting with the largest organisations, employers will have to automatically enrol their eligible employees into a workplace pension. This is called automatic enrolment.
You don't have to join the workplace scheme but it's a good idea to find out about it anyway and see what benefits it offers. This will allow you to compare what's on offer with other pension options.
You should get information about any workplace scheme you are entitled to join within two months of starting work. If you don't, contact your personnel or human resources (HR) department.
There are different types of workplace pension schemes with different benefits. It's important to understand the differences so that you can work out whether or not the scheme is right for you and what other options you may have.
On this page you can find basic information about:
- the different types of workplace pensions, including occupational pensions , automatic enrolment into a workplace pension, group personal and stakeholder pensions through the workplace
- some of the benefits of joining a workplace pension scheme
- what happens to your pension if you leave your job
- what happens when you opt out of State Second Pension to join a workplace pension scheme
- where you can get further information about workplace pensions.
A workplace pension scheme is a way of saving for your retirement through contributions deducted direct from your wages. Your employer may also make contributions to your pension through the scheme. If you are eligible for automatic enrolment, your employer has to make contributions into the scheme.
Most schemes will also provide other benefits, for example, support for your partner if you die.
There are two types of workplace pension schemes:
Occupational pension schemes are set up by employers to provide pensions for their employees. There are two different types of occupational pensions:
- final salary schemes
- money purchase schemes.
Final salary schemes
Final salary pension schemes can also be called defined benefit schemes. In a final salary scheme, 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. Your pension entitlement doesn’t depend on the performance of the stock market or other investments.
In most final salary schemes, you pay a set percentage of your wages towards your pension fund and your employer pays the rest. This means it's usually a good idea to join a final salary scheme if your employer offers one. However, final salary schemes are becoming less common and most employers no longer offer them.
Money purchase schemes can also be called defined contribution schemes. The money you pay into the scheme is invested with the aim of giving you an amount of money when you retire. Your pension is based on the amount of money paid in and on how the investments have performed. You'll usually pay a percentage of your wages into the scheme and your employer may also pay a regular amount in but this isn't always the case. However, your employer may have to offer you automatic enrolment into a workplace pension, in which case they will be obliged to make contributions.
If you're offered a money purchase scheme through the workplace, it can be a good idea to join if your employer makes contributions. However, if your employer isn't going to make any contributions to the pension or you are not yet eligible for automatic enrolment, you may want to compare the benefits of the scheme with personal pensions schemes elsewhere.
For more information about personal pensions offered outside the workplace, see Personal pensions.
Other benefits of occupational pension schemes
As well as a pension when you retire, occupational pension schemes often offer other benefits such as:
- 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, wife, husband, civil partner and other dependants when you die.
Between October 2012 and April 2017, your employer must enrol you into their workplace pension if you are an eligible employee. This is called automatic enrolment. You will be eligible if you are:
- not already in a workplace pension
- aged 22 or over
- under State Pension age
- earn more than £9,440 a year
- work in the UK.
The date your employer has to start automatic enrolment at your workplace depends on how many people are employed by your employer. You can find out whether you are eligible to automatically enrol into your employer's pension scheme, and when this will start at the GOV.UK website at www.gov.uk.
If you don't want to enrol into the pension scheme, you can choose to opt out. However, if you can afford to join the scheme, it is a good idea to do so. This is because your employer has to make a contribution into the scheme as well as you making your own contributions. Also, you will get tax relief on the contributions you make into the scheme.
You can find a useful tool on the Money Advice Service website about choosing whether to automatically enrol into a workplace pension at www.moneyadviceservice.org.uk.
If you're already in a workplace pension that meets the rules about automatic enrolment, you don't have to join another pension.
Your employer will write to you to tell you when automatic enrolment is happening in your workplace.
You can find more information and frequently asked questions about automatic enrolment on the Department for Works Pensions (DWP) website at www.dwp.gov.uk.
You can also find more on joining a workplace pension automatically on the Gov.UK website at www.gov.uk.
Workplace (or group) personal pensions and stakeholder pensions work in a similar way to the ones you can arrange for yourself.
Your employer chooses the pension provider but you will have an individual contract with the pension provider.
Group personal pensions and stakeholder pensions may be an option if you are not eligible to automatically enrol into your workplace pension.
You pay contributions into your pension fund direct from your wages. The money is invested to grow your fund which you use to provide you with a pension when you retire.
The main difference between arranging a personal or stakeholder pension yourself and joining one through your workplace is the amount of control you have over how the money you pay into your fund is invested. With a workplace scheme, the investment choices may be made for you by the provider.
Your employer may also pay contributions into a personal or stakeholder pension but they do not have to - this will depend on the terms of the pension. If your employer won't be contributing, compare what the workplace pension offers with other similar pensions on the market to make sure you're getting the best deal.
For more about how personal pensions and stakeholder pensions work, see Personal pensions.
You may also want to consider getting independent financial advice.
It's a good idea to get basic information about what your employer is offering when you start work, to help you decide if it's worth you joining the pension scheme. Here's some things to find out:
- are you eligible for automatic enrolment in you workplace pension
- is it an occupational pension or a personal pension scheme
- how much are your contributions. This will usually be a percentage of what you earn
- will the employer also make contributions and if so, how much. If you are automatically enrolled into a workplace pension, your employer has to make contributions up to a minimum level
- how will the money you pay in be invested
- how will you know what's in your fund
- if you decide not to join now, will you be able to join the scheme later.
The amount of your contributions should appear on your wage slip each time you are paid and on your P60 tax information each year. If you think your payments are wrong, speak to your employer straight away and ask them to sort it out.
If you are in a union, they may provide advice and help about your pension scheme.
Once you've decided to join your workplace pension scheme, it's best to join as early as possible to get the maximum benefit from your contributions. Some pension schemes don't let you join later, once you've said you don't want to join, so check the rules before you decide.
If you're not sure what the rules are for your scheme, ask your Human Resources (HR) or personnel department or your Union if you're in one.
There's no limit to the amount you can save up in your pension schemes. This means you can join a workplace pension scheme even if you've already got money saved up in another pension fund or you're still paying into another fund, such as a personal pension.
There are limits to how much tax relief you can get on the contributions you make to your pension, so if may not be worth paying more than you will get tax relief on.
If you're going to pay into more than one pension fund, you should work out your budget to make sure you can afford the payments before you join. You can get more information from the Money Advice Service website at www.moneyadviceservice.org.uk.
For more about tax relief on pensions, see Personal pensions.
For more information on how to work out your budget, see Budgeting.
What you do about your pension when you change jobs depends on what types of scheme you have joined. You may choose to:
- leave your pension behind in your old employer's scheme to be paid to you when you retire
- transfer your rights to a new occupational scheme
- transfer your rights to a personal pension.
It can be difficult to make the right decision without advice, even when you have all the information you need. So unless you are absolutely sure, you should get professional independent financial advice.
There are special rules about what happens to your pension if you have automatically enrolled into a workplace pension and you leave your job. You can find more on the DWP website at www.dwp.gov.uk/faqs and at www.dwp.gov.uk/keyfacts.
For more information about how to find a financial adviser, see Getting financial advice.
Don't forget to let your old pension provider know where you are if you change address later on. It's easy to lose touch and this can make things more difficult when you retire.
The Money Advice Service website has guidance on what to do if you are thinking about transferring a pension at www.moneyadviceservice.org.uk.
When you join a workplace pension scheme you may choose to opt out of the additional State Pension, also known as the State Second Pension (S2P). This is called contracting out. It means instead of building up additional state pension, you'll build up pension through the workplace scheme. You'll get a rebate on your national insurance contributions but this will go towards building up the pension scheme as a whole rather than to you personally.
If you're contracted out, you'll only be entitled to the basic State Pension (as well as your workplace pension) when you retire.
Whether or not you'll be better off contracting out is a complicated question. You should get advice from an independent financial adviser about what to do before deciding.
Many defined benefit (or final salary schemes will already be contracted out on behalf of all their members which means you won't get a choice. But, usually, you won't be worse off by joining a final salary scheme.
If your workplace offers a defined contribution (money purchase), personal pension or stakeholder pension, whether or not to contract out will be more complicated. It depends on things such as how old you are, how well your pension fund is growing and the amount of income you'll be able to get when you retire. You should always get professional advice before deciding.
For more information on contracting out of the additional State Pension, go to www.direct.gov.uk.
The Pensions Advisory Service also has a useful online contracting out planner. For more information go to www.thepensionsadvisoryservice.org.uk.
Changes to the rules on contracting out of additional State Pension
The rules for contracting out of the additional State Pension will change in April 2012. The changes mean that you won't be able to contract out through a money purchase occupational pension, a personal pension or a stakeholder pension.
If you are contracted out through one of these schemes on 6 April 2012, you will automatically be brought back into the additional State Pension.
If you belong to a defined benefit pension scheme, such as a final salary scheme, you may remain contracted out.
Your pension provider should contact you before the changes happen to tell you what is happening to your scheme.
For more information on the changes to contracting out, go to www.direct.gov.uk.
For more information about who gives financial advice and to find an adviser, see Getting financial advice.
For more information about State Second Pension, see State Pension.
Were you wrongly advised to opt out of SERPS?
The additional State Pension used to be called State Earnings-related Pension Scheme or SERPS. A very small number of people above a certain age were wrongly advised to opt out of SERPS between April 1988 and April 1997.
If you think you're in this group of people, you could be entitled to compensation. You should first write to your pension provider, asking them to explain why you were advised to contract out of SERPS and to review whether this was the best decision for you.
If you are unhappy with their response, or feel that you were given the wrong advice, you can complain using their internal complaints process. If this does not resolve the problem, you can take your complaint to the Financial Ombudsman.
If you want more help before you contact your pension provider, contact The Pensions Advisory Service at www.pensionsadvisoryservice.org.uk.
If you contributed to a pension during these years and have lost track of what happened to it, you can contact the Pensions Tracing Service at www.direct.gov.uk.
Most employers who don't yet offer a workplace pension will have to do so over the next few years, through automatic enrolment.
If your employer doesn't yet offer any type of pension scheme, you can still save for a pension through a personal pension scheme which you set up yourself.
For more about setting up your own pension, see Personal pensions.
For more information about personal pensions and to find out about other types of pensions, see Pensions.
You may also find the following Adviceguide information helpful:
The Money Advice Service
The Money Advice Service is a free, independent service. Their website has lots of useful information about pensions including comparison tables for choosing a personal pension provider and a pension calculator for working out how much pension you'll need. There's also a range of leaflets to help answer your pensions and retirement questions.
Go to: www.moneyadviceservice.org.uk.
The Pensions Advisory Service (TPAS)
TPAS gives free, confidential information and advice on occupational and personal pensions. It also has an advice service which deals especially with stakeholder pensions.
TPAS doesn’t provide financial or investment advice or recommend products.
GOV.UK (in England, Wales and Scotland)
GOV.UK is the government website. It has lots of information about the state retirement pension and other types of pensions.
Go to: www.gov.uk.
nidirect (in Northern Ireland)
nidirect is the official government website for Northern Ireland citizens. It has lots of information about the state retirement pension and other types of pensions, saving for your retirement and the changes to pensions that will be happening from 2010 to 2012.
Go to: www.nidirect.gov.uk.