Pensions are long term investments. You may get back less than you originally paid in because your capital is not guaranteed and charges may apply.
Workplace pensions are one of the best ways to save for the future. They’re tax-efficient, strictly governed, low-cost and you usually get free top-ups from your bosses. If you meet certain requirements, you should be enrolled automatically, but even if you don’t you can often sign up voluntarily. Here’s what you need to know.
This is a pension offered by your employer that you can choose to pay into. There are various different kinds on offer, but generally speaking, you make contributions that are then topped up by the company you work for and tax relief from the government.
When you start working for your employer you should be given the option to opt into their pension scheme.
You might be automatically enrolled if you are an eligible employee. Eligible employees meet certain criteria such as being over 21 and earning more than £10,000 a year.
You can choose to opt-out, but this is rarely a wise move and you will miss out on free money from your workplace in the form of employer contributions and tax relief.
There are two types of pension your employer could offer you:
A defined contribution pension: You and your employer both pay into your pension, and the money is invested to give you a retirement income.
A defined benefit pension: Your employer guarantees the amount you get and calculates it by your length of service and how much you’re paid as a salary.
A cash balance scheme is a hybrid of both a defined contribution and defined benefit pension.
Your employer guarantees you a minimum income when you retire, like a defined benefit pension, and you and your employer contribute to your pension fund, like a defined contribution pension.
You can find out more information on cash balance plans here.
If you have a workplace scheme your employer should be contributing too. The only time they don’t have to is if you don’t meet the eligibility requirements for auto-enrolment, but many will pay in despite that. Check with your HR team, in your employment contract or your scheme rules to find out more.
If you’ve been auto-enrolled into a pension, your employer legally has to contribute 3%. Some employers pay more, and some offer to match any additional contributions you make up to a percentage limit.
You can find out more about how much your employer should be contributing to your pension in our auto-enrolment guide.
You and your employer can both make contributions, but your employer has to make sure there is enough money to give you a pension based on your final salary.
This means your employer will have to make up the difference when you retire if there is not enough money in the pension fund.
This depends on the type of pension you have:
Your pension provider holds your money rather than your employer, so your pension will not be used to pay off your employer's debts. That means your savings are protected even if the company goes bust.
If your pension company folds, you can claim your pension through the Financial Services Compensation Scheme (FSCS)*.
* FCA authorised suppliers only.
Your employer has to make sure they have enough money to cover your pension. However, some struggling firms find they have a deficit between their pensions promise and what’s in the scheme.
Don’t panic, if this happens you can claim your money from a lifeboat scheme called the Pension Protection Fund (PPF). How much you get will depend on how old you are. If you’re below your normal retirement age, you should get 90% of what your pension was worth. If you’re older, you should get more than it’s worth.
If you have a DC scheme, you can usually access it from age 55, although this is due to rise to 57 from 2028.
You have several options in terms of how you take your savings including:
Withdrawing a tax-free lump sum worth 25% of your pension
Leaving your pension to grow further and withdrawing more from it later
Buying a product that offers you a guaranteed income, e.g. an annuity
Using flexible access drawdown to draw money from your scheme throughout retirement, while the rest stays invested
Taking regular lump sums, where the first 25% is tax-free
The different options have different tax implications, so you should make sure you have your free guidance session from Pension Wise before you retire. You may also want to get impartial advice on how to structure your income from an independent financial adviser (IFA),
Defined benefit schemes have different rules around when you can get your cash but typical ages are 60, 65, or state pension age. Check your scheme rules to find out when you can get your retirement income.
No, but it’s almost always a good idea. Here are a few reasons you should consider it:
Your employer can also contribute, sometimes matching how much you pay in. This is free money that you won’t get if you opt-out
Auto-enrolment schemes are subject to a charges cap, which means you pay lower fees than with lots of other investment options
There are strict governance rules meaning your money is well looked after
You get a pension representative in your company to answer any queries you have
Your contributions get tax relief which boosts your retirement savings
Saving for a pension is important to make sure you have enough money when you retire
If you are not sure if you should invest in the pension offered by your employer, then speak to an independent financial adviser to discuss all your retirement planning options first.
If you don’t want to use your employer’s scheme, you could invest in a private pension, such as a Self-Invested Personal Pensions (SIPP), which lets you manage your own pension. Be warned, you’ll lose out on employer contributions and there are more risks involved. Here is more information on how SIPPs work.