Pensions are savings which are paid into throughout your career, offering valuable security for later life. There are state pensions which are provided by the government, as well as personal pension schemes and workplace pension schemes. It’s also worth noting that there are different types of workplace pensions, offering a variety of different benefits. With so much to consider, what should you know about workplace pensions?
Automatic Enrolment
All UK businesses are required to enrol eligible workers into a workplace pension scheme. Those who are eligible will have a percentage of their salary deducted (at least 5% of pre-tax earnings) and paid into the pension, each month. Your employer will also have to make contributions to your pension, alongside your own payments.
Eligibility requirements for automatic enrolment include those who are at least 22 but below state pension age and workers who earn at least £10,000. Eligible employees must also ordinarily work in the UK and not already be in a qualifying pension scheme.
Alongside the contributions from your employer, you will also receive tax relief on the money that you pay into your pension. It is possible to opt out of the scheme but considering the benefits that you are receiving, it’s ill advised.
Defined Benefit vs Defined Contribution
There are two types of workplace pension scheme, defined benefit and defined contribution. Defined benefit are the traditional workplace pension schemes, in which the final amount that you receive isn’t dependent on factors such as investments but instead dependent on your time at the company and contributions. You are therefore guaranteed to be paid a specific amount each year, after you’ve retired. Defined benefit pension schemes are seen as a safer, more attractive option but are becoming increasingly less common.
Defined contribution pension schemes can be set up by your employer or privately and are therefore a good option for those who are self-employed. This scheme involves regular payments which are then invested into a variety of stocks and shares. Therefore, the pension pot can grow or shrink, according to how well these investments are doing. Defined contribution pensions can allow for greater growth but may not be ideal for those who are unfamiliar with investment.
Benefits
The obvious benefit of a workplace pension is a guarantee that you will have enough money in your retirement. However, there are other valuable benefits to enrolling within a pension scheme, all of which can be life-changing to you and those around you. For example, many employers will offer life insurance, meaning that your dependents will receive financial support, should you die whilst still working. Similarly, if you die whilst still working, your wife, husband or civil partner may be able to receive a pension, offering much needed security. Furthermore, those who have to stop working before they retire, for example due to ill health, can also receive their pension early.
Changing Jobs
When you change jobs, you will have to decide on what you want to do with your workplace pension. You can leave your pension at the old job and start a new scheme at your new place of work. You could also choose to transfer your rights from the old scheme to the new one, whether that be a new workplace pension or a personal pension. It’s worth noting that you can have as many pensions as you like, as long as they fall within your yearly and lifetime allowances.
Workplace pensions can be complicated, particularly when you factor in investment. Fortunately, expert advice is always on hand to help you to navigate this world. Ensuring you make the best decision for your future security.