Updated 16 May 2022
'Occupational pension scheme' is just another name for a workplace pension scheme. The terms can be used interchangeably.
If you are eligible for a workplace pension, your employer must enrol you into one by law and make contributions into it. You also pay in contributions (usually deducted automatically from your salary), helping you build up a fund for your retirement. All these contributions receive a further boost from tax relief. You should therefore consider paying in as much as you can reasonably afford, as it will mean much more money for you in the long term.
You are eligible for the workplace pension if you are:
An occupational or workplace pension scheme has several advantages over a personal pension.
You’ll be automatically enrolled in your workplace pension unless you choose to opt out, so you don’t have to go to the bother of setting up a personal pension.
The biggest advantage of a workplace pension is employer contributions. This can greatly increase the amount you can pay into your pension, sometimes more than doubling it. This boost can lead to much faster growth of the overall pot, and ultimately more pension for you.
Some employers offer a scheme called salary sacrifice to allow you to make pension contributions in a more tax-efficient way. There can be some drawbacks to this, but many people choose to save money this way while boosting their pension.
With a personal pension you’ll have to take more responsibility for checking how it’s performing – especially if it is a SIPP which you manage yourself. By contrast, a workplace pension is generally taken care of by your provider – though it’s still a good idea to check in on it from time to time.
If you are very lucky, your employer may offer a type of pension known as ‘defined benefit’ (or final salary). This pays you a guaranteed income for life from a set date, and is generally considered to be much better value for money than standard pension schemes (known as ‘defined contribution’). Some types of defined benefit scheme can later be transferred into pension pots – but it’s necessary to take advice on doing so, as it’s often not the best decision.
It’s possible to opt out of a workplace pension scheme, but generally not a good idea (except in rare circumstances). It is illegal for an employer to ask you to opt out of the workplace pension scheme, or to put any pressure on you to do so. If you are concerned about joining it (for instance, if your pension savings are already close to the lifetime allowance), then talk to a financial adviser. You may think that by not joining the workplace pension, you will have more take-home pay. However, you would be missing out on employer contributions as well as tax relief, so you would be turning down a large amount of 'free money' besides depriving yourself of income in later life. Generally the only good reason to opt out is to avoid exceeding the lifetime allowance, which only people with existing large pensions are at risk of doing.
Most people have a defined contribution (DC) pension, where you and your employer pay a portion of your wage into your pension each month to build up a pot of money. Defined benefit (DB) schemes are different, and provide a guaranteed income for life from your set retirement age. This income is calculated based on how much you earn and how long you’ve been a member. When you retire, you will be paid a set amount for the rest of your life.
The type of pension you have will usually be clear from the information provided by your pension scheme. If you’re unsure, ask your employer or the scheme itself.
If you’re enrolled in a workplace pension, you must pay in at least 5 per cent of your pre-tax earnings. This percentage is usually calculated from your total wage, including bonuses and commissions, overtime, statutory sick pay and maternity, paternity and adoption pay. You can of course pay more than this if you wish, so long as the scheme and your pension allowances permit.
Your employer must pay a minimum of 3 per cent of your wage into your pension. You can usually increase the amount they contribute by increasing your own contributions as well.
There is no limit on the number of pensions you can have at one time, so you’re free to have an occupational and personal pension(s). The only restriction is that you can only pay in up to £40,000 or 100% of your salary (whichever amount is lower) per tax year.
Many people don’t realise that they could get a lot more value from their workplace pension. Something as simple as changing how your money is invested could give your retirement savings a significant boost, perhaps by tens of thousands of pounds.
Assuming you have a DC pension (a ‘pension pot’), it will be invested by the scheme in a selection of assets, known as a fund. You hope that this fund will perform well over time so that your pension pot grows larger. However, your choice of pension fund can make a big difference here.
Unless you request otherwise, your pension will be placed into the scheme’s ‘default fund’. A default fund is broadly designed to meet the needs of all employees, i.e. both young and old, junior and senior. This means it may suit everyone to some extent – but is unlikely to suit anyone perfectly.
Fortunately, most pension schemes also offer a range of other funds to choose from, some of which may be more suitable for you. For example, some funds may over lower-growth, safer investments for those nearer retirement, or high-growth, high-risk assets for people early on in their career. Certain funds may also have higher fees attached. It’s possible to switch between funds as your career progresses, so that your pension continues to suit your circumstances.
Your choice of pension fund can make a difference of tens of thousands of pounds to your final pension pot, so this isn’t a trivial decision. A financial adviser can help you decide which fund is best for you at any given time.
Follow these tips to see if your workplace pension could be working harder for you.
Nest is an occupational or workplace pension scheme that was set up by the government and can be offered by any employer as the company’s occupational pension scheme.
Yes. The NHS pension scheme is the occupational pension offered to anyone working for the National Health Service.
You don’t pay National Insurance contributions on any income you receive from your occupational pension, including annuities and final salaries, but you may still have to pay income tax if you receive more than £12,500 per tax year.
Before 2016, you or your employer could ‘contract out’ your workplace pension or chose to pay a lower amount of pension-qualifying NI contributions in favour of paying into a private pension scheme. The amount of additional state pension you receive will depend on your SERPS (State Earnings Related Pension Scheme) contributions. You may have been contracted out without even knowing. An IFA can help you track down any protected rights pensions you’re not aware of.
Your occupational pension is entirely separate to and does not affect your state pension, which is based on how many qualifying years of National Insurance payments you have.
Neither occupational nor personal pensions count as earnings, so they will not affect your entitlement to carer’s allowance. However, if you’re claiming ESA, both means tested and contributory, any pension income above £85 per week will reduce the amount you receive.