Workplace Pensions

A Workplace pension is a pension that is arranged by an employer and is a common way to save for retirement. With a Workplace pension, both an employee and employer will automatically contribute to the pension.

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What is a Workplace Pension?

A workplace pension is arranged by your employer, putting money aside into a retirement pot for when you reach retirement age. You will pay a percentage from your salary before tax deductions into your pension and your employer will normally contribute too. Speak to your employer to check your current contributions.

In February 2018 it became compulsory by law for all employees to be auto-enrolled into a workplace pension scheme. You can opt-out if you wish by speaking to your employer.

There are two common types of workplace pensions:

  • Defined contribution pensions
  • Defined benefit pensions

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How are workplace pension contributions calculated?

UK workplace pension contributions are currently calculated on the basis of legislation for Automatic Enrolment, which became compulsory for all employers in February 2018.

Workplace pension contributions are made by three parties:

  1. The employee
  2. The employer
  3. The UK government

A minimum level of contribution must be made (by law) by each party. This minimum level is a percentage of either the employee’s "qualifying earnings" or "pensionable pay" – and the employer decides which calculation is used.

In both cases, as from April 2019, in the UK:

  1. The employee must make a minimum contribution of 5% (1% of which is in the form of tax-relief from the government)
  2. The employer must make a minimum contribution of 3%

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Are workplace pensions transferable?

Yes. If you have a pension held by your employer, you can transfer out of it if you wish.

You may want to do this if:

  • You’re moving overseas and want to take your pension with you
  • You have secured a new job
  • Your current pension scheme is being wound up
  • There is another option available, which offers a better return on your pension contributions or is more suitable to your requirements

There are two main types of workplace pensions in the UK – Direct Benefit (DB) and Direct Contribution (DC) – and you can transfer out of either of them. Be aware that there are always financial consequences for doing so, and the standard advice is to stay put unless you are certain of what you are doing.

You can transfer your workplace pension into any of:

Professional advice is a must if you are considering transferring out of your workplace pension. By law, if you are thinking about transferring out of a DB pension with a transfer value above £30,000, you must consult a professional advisor.

Check out the UK government’s official website on transferring your pension.

You can get free and independent advice about transferring your pension from:

Remember that you cannot cash out (as opposed to transfer) any pension in the UK until you have reached the age of 55.

Automatic enrolment has increased the number of UK employees contributing to a Workplace Pension by 55% since 2012

– The Office of National Statistics

How to increase my workplace pension?

You can increase the value of your workplace pensions by making more personal contributions.

You can arrange to make more personal contributions by either asking your employer to set it up for you, or by arranging to make extra Direct Debit payments yourself.

If you do decide to invest in your future a little more in this way, be reassured that you can always change the arrangement back if it doesn’t suit you: "You can always reduce your pension contributions back to the minimum amounts if things change and you don’t have enough spare cash each month." (thepeoplespension.co.uk)

But how about if you want to max out? There is an upper limit to how many pension contributions you can make in total each year. This annual allowance limit is set by HMRC, and for 2019/2020 it is £40,000. Recently, a tapered allowance has been introduced for high earners. It mainly affects people who earn over £150,000.

You can make workplace pension contributions of up to 100% of your salary provided that the total of your pension contributions (across all pension schemes), including tax relief does not exceed HMRC’s annual allowance limit for the year.

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What will my workplace pension be worth?

This can only be determined on a case by case basis. Your IFA is best-placed to assess your unique circumstances as an individual.

Using an online pension value calculator can arrive you at an accurate figure, just make sure you have all your details to hand, including, the % contributions both you and your employer currently make.

The value of your workplace pension depends on what type of workplace pension it is, and how much you and your employer have invested in it over the years.

Direct Benefit (DB) pension schemes are considered to be more valuable than the Direct Contribution (DC) schemes which are replacing them. But as the Financial Times observes, "Nowadays DB schemes still open to new members are rarer than hens’ teeth."

Review the difference between DB and DC schemes here with the UK government’s Pensionwise.

Can I cash my workplace pension?

It depends how old you are.

Thanks to the UK Pension Freedoms of 2015, you can cash your entire workplace (or private) pension when you reach the age of 55.

Note that, "If you’re a member of a workplace pension scheme, you generally require the consent of the employer or ex-employer. In some instances, you may also need the consent of the pension scheme trustees." (pensionsadvisoryservice.org.uk)

With a private pension scheme, on the other hand, you can cash out without anybody’s consent.

There are tax implications in both cases. 25% of your drawdown will not be taxed, but the remaining 75% will be taxed as income.

Tax rates, allowances and reliefs are as at May 2019 and are subject to change in the future. The benefit of any allowances and reliefs depends upon your personal situation and may also change over time.

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