Yes! You contribute both to the State Pension – if your earnings are above the NI threshold – and your workplace pension, if you’re enrolled in one.
They are two completely different pension schemes. The State Pension is provided by the Government and a workplace pension is provided by your employer.
You are auto-enrolled in a workplace pension. You have the option to opt out of this private pension plan if you don’t want to save for your retirement. Also, you receive a State Pension income based on the amount of National Insurance contributions on your record.
Let’s see how these two pension schemes are different from one another and how they don’t affect each other.
Contributions
You contribute to your State Pension through National Insurance contributions or credits. You pay into your workplace pension through your salary each month.
You pay NICs when you work and you earn above the threshold £6,396 per year. If you earn less than this amount, you don’t make contributions to National Insurance. When you don’t pay NICs, you have gaps in your record. You won’t receive the full State Pension of £185.15 per week (2022/23) when you have gaps; instead you’ll receive less than this amount. However, you can pay voluntary NICs which will fill up any gaps in your record and will allow you to receive the full State Pension.
Your employer also adds a 15.05% of NICs to your record.
On the other hand, you make direct payments to your workplace pension plan from your salary. Under auto-enrolment rules, the minimum amount of total contributions to your pension is 8% of your qualifying earnings. Your employer usually contributes a minimum of 3% and you contribute the rest 5%.
The State Pension and workplace pension are two different pension pots that you save in. It is important that you have a workplace pension along with your State Pension. The State Pension income doesn’t guarantee you a comfortable retirement.
Tax
These two types of pensions are also different in terms of tax.
You don’t get tax relief when you pay your NICs for your State Pension.
But you get tax relief on your workplace pension contributions. The Government rewards those who save into a private pension for their retirement. The tax relief you get is based on your Income tax rate. If you’re a basic-rate earner, you get 20% tax relief on your pension contributions. If you’re a high earner then you get an additional 20% tax relief.
For example, if you’re a basic-rate earner and you save into your pension £100, it actually costs you £80. This is because on the £100 you get 20% tax relief, meaning that the Government adds £20 as tax relief to your pension pot.
Withdraw your pension
The age you can withdraw your pension between these two types of pensions is different too.
State Pension age is 67 (as of 2022/23). Unless you choose to delay receiving your State Pension age, you can only access your funds at 67. You have to claim your State Pension and the funds will be released to your bank account monthly.
On the other hand, you can access your workplace pension savings at 55 (as of 2022/23). You also have the option to defer for a few years and receive your savings later in life.
Once it’s time to draw an income from your workplace pension, you have the option to receive your savings as:
- an income drawdown.
- You can purchase an annuity with your pension savings.
- You can withdraw lump sums.
- You can receive your savings based on a mix of the options above.
A drawdown allows you to receive a monthly income from your savings, leaving the rest invested. An annuity guarantees you an income for life or a fixed period of time. Lump sums are convenient in certain situations as you can withdraw 25% of your pot tax-free. Most opt to receive their pension based on a mix of the above options.
For instance, someone may choose to receive their savings as a tax-free lump sum and travel for a while. Once they’ve spent the lump sum, they opt to receive a monthly income from their pension.
How does an occupational pension affect your State Pension?
In short, it doesn’t!
You can receive both the State Pension and a workplace pension, once it’s time. They are two different pensions. The former is provided by the Government and the latter is a private pension set up by your employer. They’re also different in how you contribute to them, their tax efficiency and in the age you can receive them.
Book a call with Husky and we’ll explain how workplace pensions work. We’re experts in auto-enrolment pensions since we set them up for employers and manage them.
We help employers and employees manage every aspect of their workplace pension, from start to finish.
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