Updated 03 September 2020
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:
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.
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.
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.
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