A Guide to Employers Pensions & How They Work

Anthony Burgess (Pension & Investments)

Written by Anthony Burgess (Pension & Investments) on September 26, 2018

Updated June 6, 2019

Employers pension scheme explained

Inevitably, as time passes, we get older. Getting older comes with the added benefit of retirement and hanging up your work shoes for the last time. Unfortunately, retirement also brings about the end of wages and stability- unless, of course, you have a plan in place that ensures you still have the means to live a content and fulfilling life.

More than 8 million employees have started to reap the benefits of workplace pensions since automatic enrolment was introduced in 2012, because of the fact that paying into a workplace pension is one of the easiest ways to start saving for your retirement.

Questions are often raised about whether a workplace pension is right for the average employer or not and in short, they probably are due to the fact that they are one of the most efficient methods of starting to save up for your retirement days. Don’t just take our word as gospel; read on for an unbiased viewpoint on employers pensions and the ins and outs of what they entail.

What Are Employers Pensions?

Employers Pensions, or workplace pensions, are a fund that helps support the cost of living after you retire from work. This is through automatic contributions that are deducted from your monthly payslip. Employers then make contributions towards your pension using the scheme.

What Are The Eligibility Requirements?

Eligibility for the workplace pension is for people;

  • Aged 22 or over
  • Earning more than £10,000 a year
  • Not already enrolled in a workplace pension scheme.

What About State Pensions?

Most people are entitled to a state pension from the government which will cover some living costs when you choose to retire but having the additional support of a workplace pension can be used as a means of supplementing this basic government pension.

What Is My Company Goes Bust?

The pensions are protected if your employer goes bust because defined contribution pensions are usually run by pension providers, not by the employers, meaning that you will not lose your pension if your employer goes bust. Furthermore, if your pension provider goes bust, assuming they are authorised by the Financial Conduct Authority and are unable to pay you, you can receive compensation from the Financial Services Compensation Scheme.

Minimum contributions for Employers Pensions will continue to rise. Make sure you stay up to date with the contributions you have to make and budget accordingly.

Who Can Receive An Employers Pension?

Whether or not you are eligible for a workplace pension depends on a number of factors, and you should consider the terms of your contract when exploring whether you are entitled or not. Many, although not necessarily all, workers are covered by the new pensions auto-enrolment, and whether or not you qualify to be enrolled depends on your age and your earnings.

Being over the age of 22, earning at least £10,000 and working within the UK normally assures your eligibility, and the new law requires your employer to enrol workers under these conditions automatically.

People between the ages of 16 and 21 or else between state pension age and 74 can ask to opt into the scheme if they fall into the over £10,000 threshold. Workers between 16 and 21 who earn less than £10,000 but more than £5,824 can also ask to opt into the scheme.

How Much Does An Employers Pension Cost?

Enrolling in the scheme doesn’t cost anything, per se, but does require monthly contributions from your payslip.

Understanding Your Pension Scheme

Employers who auto-enrol their employees onto the workplace pension must provide their employees with the following information upon doing so. All employees have the right to know;

  • When they were added to the scheme
  • Which company it is that runs the scheme on their behalf
  • What type of scheme it is
  • How much both parties will contribute
  • What they need to do if they wish to opt out.

Employers are able to delay enrolling their staff automatically for up to three months if they wish to do so, however, if the employee asks to be enrolled on the scheme, then they cannot be stopped from doing so.

If you’re earning more than £5,564 from a single job, or claiming child benefit, carer’s credit or illness and disability benefits, you could have been inadvertently contributing to an additional state pension, which is consequently an extra fund that adds money onto your basic state pension.

Again, this scheme is not mandatory, and you can opt out at any point although it’s important to note that contributing to this additional fund will ensure you have a larger state pension.

Four Advantages Of Employers Pensions

You aren’t required to join a workplace pension scheme if you do not want to do so but doing so can offer a number of useful benefits. Most companies who provide the system will automatically enrol their staff onto it, but it is possible to opt out if you believe the scheme isn’t for you.

1. Employers pensions are an effortless plan for the future

Saving money can be tough, particularly when the cost of living is on the rise. It’s incredibly tempting to spend whatever you may have leftover at the end of the month on a treat for yourself or a loved one, meaning there’s actually nothing left to put in your saving’s account for the future.
Being enrolled in a workplace pension is effortless in the sense that you don’t have to think about putting money away each month as this is done automatically for you as a means of growing your pension fund. This effortless contribution to your fund comes directly from your monthly payslip at a certain percentage. This depends entirely on your company and can differ between people working in different organisations.

Because of the concept of automatic enrolment, you don’t even need to go to the effort of signing up for the scheme – simply opt out if it doesn’t appeal to you. Funds raised through your workplace pension will be taken care of by the government and released to you when you retire.

Your pension follows you if you change jobs because of automatic enrolment and the contributions you make are relative to your salary, making it an affordable option.

2. Supplement your state pension

State pensions are able to be taken by eligible pensioners as standard and, depending on how much you have contributed through national insurance, and the number of credits you are entitled to can be worth up to £164.35 per week.

This standard state pension usually won’t allow for the lifestyle you had pre-retirement. A workplace pension can ultimately supplement this pension further, ensuring that you have more than enough money to live comfortably through your pension.

3. Matched payments from your employer

Your worker’s pension has an additional benefit in the sense that any contribution you put into your scheme will be matched by your employer, meaning the amount of money that you have when you are at the age where you can take advantage of your pension will be double.

Paying into a pension scheme from a younger age gives you the opportunity to reap the rewards and puts less pressure on you to increase your contributions at a later date. If you change employers, your pension carries forward with you.

Having the peace of mind of a workplace pension ensures that you meet your retirement goals, stress-free and contently. Matched payments are not always the case, but the employer is obliged to pay at least 2% of your monthly wage – although they may well choose to contribute a slightly larger percentage depending on the circumstances surrounding your contract.

4. Achieve the lifestyle that you envisaged in retirement

Nowadays, sources estimate that, assuming you are without debt and mortgage when the time has come to retire, that 50 or 60% of your annual salary is a good amount of money to aim for in terms of your pension.

This is true if you take into consideration the fact that certain expenses are no longer necessary after retirement. For example, commute costs may well decline, and you might find yourself needing less money to support your daily living costs.

Let’s be fair – no one wants to spend the rest of his or her lives worrying about the costs of living so having this reassurance of a workplace pension takes off the stress and allows you to concentrate on the important things in life.

There are situations where your employer is not legally obliged to enrol you into their worker’s pension scheme. These include:

  • If you have already given notice to your employer.
  • If you have evidence of having Lifetime Allowance Protection.
  • If you’re from another EU state and are part of an EU cross-border pension scheme.

In spite of these, if you want to join their pension, then you are still allowed to do so, and your employer cannot refuse to accept you. Your employer cannot discriminate against you for being, or not being, in a workplace pension scheme nor can they encourage or force you to opt out of this scheme.

What Are The Disadvantages Of Employers Pensions?

The obvious disadvantage of an employers pension is that such a contribution is a deduction from your monthly wage. Your take-home pay each month is reduced because this percentage of your salary automatically gets paid into your pension scheme.

If you choose to opt out of the scheme, then ultimately you will receive a lower wage than someone on the same wage bracket as you who is still enrolled, because of the fact that your employer contributes to your pension as well.

Another major disadvantage for workplace pensions is, of course, because it cannot be accessed at any time – the retirement age is heightening on a yearly basis, meaning that it may well be a long time before you can access the money you have contributed.

Pension Confusion

Finally, pensions can be complicated. When you reach retirement age and the time has come where you are able to take out your pension, you’ll be given the option to take up to 25% of your pension as a lump sum, reducing the amount you receive monthly to subsidise your living costs.

If you choose not to take the lump sum, then die earlier in life, then the full benefits of the pension scheme will not be available to you as an individual – how long you live determines whether or not a lump sum would be of better value to you. Added talk of annuities and other complexities can make the thought of a pension all the more confusing, and often, it may well not be of any additional benefit to you.

With all of the above in mind, it is well worth speaking to an independent pensions adviser who can help you to assess what is right for you and your retirement.

Joining your company’s pension scheme puts you in charge of your own future. If your situation changes, you can opt out of your scheme and stop contributing towards your pension. When you’re ready to retire, you can decide what to do with the money and how you would like to take out your plan. Any money you invest in your pension scheme will remain in the scheme until you reach the minimum age of retirement, which is usually 55 years old.

Two Alternatives To Employers Pensions

1. Take out an ISA and make personal contributions each month

Building your own pension fund in this way can be beneficial for a number of reasons. Firstly, the money you transfer into the ISA will build interest over the years. This means that your contributions can be higher, and the amount you put in can change depending on your personal circumstances.
You can choose to put in more or less each month, depending on other factors that the pension fund doesn’t take into consideration, such as unexpected costs.

2. Using the value in your home

If you own property, this may be of significant value to you when you choose to retire. If you are without a pension, then having a mortgage-less property that you can either sell and downsize, using the profits to pay your way through retirement, or else use as a means of taking out an equity release plan, can be of benefit to you.

This is a viable option for a large number of people as it ensures that enough cash is raised to live comfortably and can be done safely and without risk. Of course, the housing market can fluctuate, and your property is never guaranteed to fetch the same or higher price in the future.

You and your employer may agree to use a type of scheme called a ‘salary sacrifice’ – something referred to as a SMART scheme, where you give up part of your salary each month, and this is paid straight into your pension each month by your employer. In some cases, this can ensure that you receive a reduction in tax and national insurance payments.

You should check with your employer to see if they use the salary sacrifice scheme or not.

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