Should I stick with a workplace pension?
BY 2018 all employers will have to offer a workplace pension scheme of some sort, and automatically enrol any eligible employees.
It's thought that between eight and nine million more people will be saving for their retirement as a result of auto-enrolment by 2018.
Saving for our retirement is one of the most sensible, tax-efficient, things we can do financially, and the sooner we start the better.
And compared to trying to organise a pension for ourselves, opting in to a workplace pension is a fairly simple process.
But what exactly do they offer?
Three types of pension
There are, broadly speaking, three kinds of workplace schemes:
- occupational pensions,
- multi-employer pensions, and the other type, which includes
- group personal and stakeholder pensions.
These are set up and run entirely by employers, so they tend to be the preserve of bigger companies. They come in two types: defined benefit, and defined contribution.
Defined benefit, or final salary, schemes are increasingly rare. They guarantee a set return upon retirement - based upon the final salary of the member when they stop working for the company.
The employee's contributions are topped up - sometimes matched - by the employer. But final salary schemes have proved to be increasingly expensive for companies to run.
Defined contribution schemes are the norm nowadays.
As before, members contribute a set amount every month. Under the rules of auto-enrolment, the employer must make contributions too, but this tends to be lower than anything seen in final salary schemes.
In addition, the return is much less certain - depending as it does on how much is paid in to the fund and its investment performance, rather than how much the employee earns when they leave the company.
Outside the rare occupational final salary pension schemes still running, almost all workplace pensions on offer these days are defined contribution schemes.
These straddle the ground between the occupational pension scheme and the group pension schemes. They work much like occupational pensions, but they're provided by an organisation that isn't your employer, like group personal pensions are.
Group personal and stakeholder pensions
These are essentially the same as the pensions sold to individuals, with two main differences.
The first is that the employer chooses the pension provider and type (personal or stakeholder), and the second is that under auto-enrolment, the employer must also make contributions towards each worker's pension.
If and when you leave an employer providing either of these, your "group" pension converts to a "personal" fund to which you can continue to contribute - or leave it to grow as an investment.
Am I eligible for auto-enrolment?
Every employer must automatically enrol any workers into a workplace pension who meet the following criteria:
- the worker is aged between 22 and State Pension age, and
- would usually earn more than £10,000 a year, and
- works in the UK
The Government has an online eligibility test here.
You're covered whether you're on a short-term contract, an agency pays your wages, or you're on maternity, adoption or carers' leave.
But while auto-enrolment suggests having a workplace pension is mandatory, it isn't.
People can choose to opt out of their employer's scheme if they want, for example if they can't afford the contributions.
Do this within a month of being enrolled and you'll get back any payments you've made. After that, any payments will stay in your pension pot until you retire.
If you change your mind again, you can rejoin the workplace scheme later - and employers are obliged to re-enrol everyone roughly every three years, as long they're still eligible.
So what will it cost me?
There's a minimum amount that must be paid into workplace schemes, based on each worker's qualifying earnings, defined as one of the following:
- anything earned before tax, between £5,772 and £41,865 a year
- a worker's entire salary or wages before tax
It's up to the employer to choose how to calculate their workers' qualifying earnings.
Whichever method is used, the minimum amounts that must be paid into the pension are as follows:
|Minimum contribution from worker||Minimum contribution from employer||Government top-up|
|0.8% of qualifying earnings, rising to 4% by 2018||1% of qualifying earnings, rising to 3% by 2018||0.2% of qualifying earnings, rising to 1% by 2018|
Bear in mind that these are minimums, and many employers will offer schemes where they and their workers can and do pay in more than this. In some such schemes, the amount is a fixed percentage of the worker's salary or wages.
Other schemes will allow workers to pay in less, as long as they still make the minimum contribution and their employer also puts in enough to meet the legal minimum.
Just as with other forms of individual pension, everyone who pays income tax will automatically qualify for tax relief from the Government on all pension contributions up to 100% of the individual's annual earnings.
Basic rate taxpayers will get tax relief at a rate of 20% added to their pension savings. All personal pensions offer this "relief at source".
It should also be automatic in workplace pensions, as long as the employer takes pension contributions from a worker's earnings before they deduct income tax.
People who don't earn enough to pay income tax do qualify for relief at source, but only on the first £2,880 of contributions per year.
It's worth it
We're living longer, and one in five of us thinks we'll never actually get to retire.
But even given the slow retreat of the state pension age, most of us will face at least a decade where we're not working - and the average person's retirement savings will only last for seven years.
On top of the tax relief, the small but significant boost provided by employer contributions means that anyone who can afford to join their workplace pension should seriously consider it.
In fact, Citizens Advice recommend that only those with serious money issues - for example, those who owe a significant amount - should opt out.