What are employer's pensions?

If you work for someone you could be savings towards your retirement through an employer's pension. Here is what they are and how they work.

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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.

What is an employer's pension?

It is a pension offered by your employer that you can choose to pay into.

How do you get an employer's pension?

When you start working for your employer you should be given the option to opt into their pension scheme.

You could be automatically enrolled into your employer's pension scheme when you start your job if you are an eligible employee.

If this is the case you can also opt out if you do not want to pay into your employer's pension.

What pension could your employer offer?

There are two types of pension your employer could offer you:

  • Defined contribution pension: You and your employer can both pay into your pension, and the pension supplier invests the money to give you a retirement income.

  • Defined benefit pension: Your employer guarantees the amount you get and calculates it by your length of service and how much your salary is when you retire.

Here is more information on both types of pension

What is a cash balance scheme?

It 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. Does your employer pay into your pension?

Not always, and the type of pension you have can have an impact on how your employer contributes:

Defined contribution pension

Your employer may have to contribute into your pension, on top of anything you pay.

You can find out how much your employer should be contributing into your pension in our auto enrolment guide.

Defined benefit pension

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.

What happens if your employer goes bust?

This depends on the type of pension you have:

Defined contribution pension

Your pension supplier holds your money rather than your employer, so your pension will not be used to pay off your employer's debts.

If your pension supplier goes bust, you can claim your pension through the Financial Services Compensation Scheme (FSCS)*.

* FCA authorised suppliers only.

Defined benefit pension

Your employer has to make sure they have enough money to cover your pension.

If they do not then you can claim all your pension from the Pension Protection Fund if you have already retired, and 90% of your pension if you have not retired yet.

Here is more information on pension protection

When does your pension pay out?

For a defined contribution pension, when you turn 55 you can:

  • Withdraw a tax-free lump sum worth 25% of your pension

  • Leave your pension to grow further and withdraw more from it later

  • Move your pension into a product that offers you a guaranteed income, e.g. an annuity

For a defined benefit pension, you can start taking an income as soon as you reach 65.

Here is more information on pension withdrawals

Do you have to save into your employer's pension?

No, but here are a few reasons why you should consider it:

  • Your employer can also contribute, sometimes matching how much you pay in.

  • Pension suppliers often offer lower administrative fees to attract employers to use their schemes for their employees, saving you money on what you save each year.

  • You get a pension representative in your company to answer any queries you have.

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.

Alternatively, you could invest in a Self Invested Personal Pensions (SIPP), that lets you manage your own pension. Here is more information on how SIPPs work.

You can help ensure you have the retirement you want by finding the best personal pension plan to make your money work as hard as it can.