Can small businesses opt-out of providing a pension scheme?

No. Companies with one or more employees are required by law to offer a workplace pension scheme to all employees aged between 22 and the state pension age. So a small business cannot “opt out” of providing a pension – unless it is solely made up of directors who prefer not to have a workplace scheme. However, auto-enrolled employees can choose to “opt out” of the pension scheme within the first month.

How do pension schemes benefit employees?

Workplace pension schemes allow employees to save for retirement in a tax-efficient way while also benefiting from employer contributions to their pension pot, at a rate of at least 3% of their salary. Offering an attractive workplace pension is therefore one way to recruit and retain talented workers.

What happens to the pension if an employee leaves the company?

If an employee leaves the company, the money in his or her workplace pension pot remains invested, but both the former employee and the employer generally stop paying into the scheme. Refunds (of their personal contributions) can be offered to employees who spent under two years at the company, while those going to new jobs can often choose to transfer their pots to their new employer’s scheme. If nothing is done, the existing pot remains invested until the employee reaches retirement age.

Our best workplace pension schemes

Workplace pension schemes for your small business

Here’s what you need to know to choose and set up the best company pension scheme for your needs.

What is a workplace pension?Is it a legal requirement?Government-backed schemes Things to consider How to set up FAQs

AuthorLucinda O'Brien

Fact checkerCathy Hudson

Last updatedJune 2nd, 2025

What is a workplace pension?

A workplace pension is a scheme that employers are legally obliged to offer their employees to help them save for their retirement.

As an employer, you must automatically enrol any eligible employees into a workplace pension scheme and contribute at least a minimum amount towards it.

Current rules set the total minimum contribution at 8%, with at least 3% coming from the employer.

There are two main types of workplace pension schemes:

Defined contribution schemes

These are schemes where the money is paid in by both the employer and the employee’s contributions and then invested by a pension provider. The value of the pay-out can therefore rise or fall depending on how the investment performs.

Defined benefit schemes

also known as final salary schemes, these pay out a fixed amount depending on how long an employee has worked for you and how much they earned. However, they are a high-risk and expensive option for employers, which is why most are now closed to new members.

As an employer, you must automatically enrol any eligible employees into a workplace pension scheme and contribute towards it"

Is it a legal requirement to provide a workplace pension?

Yes, both big companies and small and medium-sized enterprises (SMEs) must provide workplace pensions for their employees. And even businesses with just one employee are classed as employers.

Your legal duty to provide a workplace pension scheme starts on the day you first employ one or more people; failing to meet this duty could result in a fine of up to £10,000 a day, as well as a criminal conviction that could land you behind bars.

Should you opt for a government-backed provider?

If you don’t employ many people, you may find it easier to use the government-backed National Employment Savings Trust (NEST) scheme. It’s free, easy to set up, and available to all, while the government involvement also makes it a low-risk choice.

However, private pension providers offer similar options that may be better suited to your employees’ needs. And as long as the provider is authorised by the Financial Conduct Authority (FCA), employees can get compensation should it go bust.

Larger organisations, meanwhile, may prefer to maintain greater control by appointing a trust to run a pension scheme specifically for their employees. Further information on trust-based schemes can be found in the Pension Regulator toolkit.

Whatever route you take, it’s worth consulting an independent financial adviser or accountant to make sure you choose the best workplace pension for your company.

It’s worth consulting an independent financial adviser to make sure you choose the best workplace pension for your company"

Things to consider when choosing a workplace pension scheme for your business

Cost to you

Some schemes, such as NEST, are free of charge for the employer. Others involve paying a monthly fee, which may be linked to the number of employees concerned. Using a professional payroll bureau can earn you a discount with some providers.

Cost to employees

Employee costs such as annual management fees will depend on both your choice of pension scheme and the underlying investment fund.

Set up and maintenance

Choose a scheme that is easy to set up and integrates easily with your existing payroll will make the process much simpler. Looking for one that can be managed online will help with this.

Member experience

A self-service website makes it easier for employees to manage their pension savings, while an app and educational resources can help to encourage them to save more. It’s also worth choosing a provider that allows free transfers in, enabling employees to keep all their pension savings in one place.

Customisation

Features such as salary sacrifice can be attractive for both you and your employees. Look for a scheme that can be customised to the needs of the company and its workforce.

Choice

Look for a provider that offers enough choice to cater for a diverse workforce – without getting too complicated. Many auto-enrolment providers offer around five funds for employees to choose between depending on their investment objectives.

How to set up a workplace pension

Things to bear in mind when setting up a workplace pension:

Choose a scheme

Employees need to be registered on day one, so it’s important to find a scheme that is ready to go.

Enrol eligible employees

All eligible employees aged between 22 and the state pension age must be enrolled and make regular contributions into a pension scheme. You must also enrol other workers, such as those earning under 22 or earning less than £10,000 a year, on their request. Company directors do not usually have to be automatically enrolled as they aren’t typically classed as members of staff. But they can be in some circumstances, such as if they have an employment contract.

Inform staff

All new joiners need to be notified within six weeks that they have been enrolled in a pension scheme. This should be done in writing.

Set up employer and employee contributions

How much you contribute to your employee pensions is important and should be discussed with your accountant. You must also arrange for any employee contributions to be taken out of their wages. Payroll software can handle this all automatically once set up.

Tell the Pensions Regulator

You need to notify the Pensions Regulator within five months of setting up a scheme and confirm that it is compliant.

You're done

Once your workplace pension is up and running, you’ll also need to monitor employee ages and earnings (in case extra workers become eligible), maintain monthly contributions and manage opt-in/out requests and re-enrolments.

“Providing a workplace pension scheme is a legal requirement so it's crucial that you take the time to weigh up the options out there to find the right scheme for both your business and your employees. Checking the cost to you against the benefit for your employees is a good place to start.”

Lucinda O'Brien

Senior finance editor

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About the author

Lucinda O'Brien

Lucinda O'Brien has spent the past 10 years writing and editing content for regional and national titles. She applies her industry knowledge to ensure readers can make confident financial decisions.