What is a UK Company or Workplace Pension Scheme?
A Company or Workplace UK Pension is one that’s organised for you by your employer. They work by you paying a percentage of your salary into the pension scheme every payday.
Should I take a workplace pension?
In the majority of cases, the government and your employer contribute to your pension. This is the defining reason for people joining company pension schemes and contributions aren’t eligible for income tax.
You can usually take some of your workplace pension as a pension lump sum when you retire. 25% of that will be tax-free.
Defined contribution workplace pension schemes
Defined contribution workplace pension schemes are also known as money purchase or DC schemes, work by your employer selecting a pension provider who will invest the money you pay in. Many schemes operate what is known as a glidepath, moving your money into lower-risk investments as you near retirement so that you can maximise your income.
The amount you get at retirement will depend on:
* the administration fees charged by the provider
* how much has been paid in
* how long you’ve been paying in for
* how well the investment has performed
Defined benefit workplace pension schemes
Defined benefit workplace pension schemes which are also known as final salary schemes, are being phased out in favour of defined contribution pensions. This is because they cost more to administer. They work by promising to pay out a certain amount when you retire, based on your salary and unlike DC schemes, which are based on your contributions. How the investments perform won’t affect what you get.
People who work in the public sector such as for the NHS, armed forces, police and teachers are enrolled in final salary schemes. This has led to criticism of public sector pension schemes as being more generous than private sector schemes and has been cause for reform.
Auto-enrolment
Since 2012, all employers have had to offer a pension scheme to staff. All workers who earn above £10,000 a year will be automatically enrolled into a pension. Companies without a scheme of their own can enrol workers into the National Employment Savings Trust (Nest).
What happens to my pension when I change jobs?
If you have left a job, you can transfer your pension to the scheme at your new workplace. However, this can be complicated. If you are transferring out of a defined benefit scheme into a defined contribution scheme, for example, you should consider the fact that you are giving up a promised payment at retirement.
Transferring defined contribution schemes is much easier, you can just take the funds with you. However, consider any exit fees and the annual management charges on the new scheme, which could decrease your pot.