Pensions are a tax-efficient way of saving money for your future self, once you decide to retire and enjoy your time.
It’s like an unbreakable piggy bank on your desk, in which you – and your employer – put money in every month to save until it’s time to break it. And until then, this little pot of gold is slowly growing.
An occupational pension or a workplace pension, is a pension pot arranged with your then employer for you to retire with a stable income and a peace of mind. It needs to be planned as early as possible and as soon you start working.
Learn more on workplace pensions here and what you need to know to start planning for one
What is an occupational pension?
An occupational pension is a type of pension arranged by your employer. You save money into your pension pot by automatically contributing into it before getting paid. Although they are arranged by your employer for you, contributions are made by your employer, yourself or both! The contribution you make is separate from your NI contributions which count towards your State Pension.
There are quite a few workplace pension schemes such as:
- defined benefit scheme
- defined contribution scheme
- group personal pension or GPP
- and stakeholder pension scheme.
Although a stakeholder pension is considered a personal type of pension since the contract is individual and arranged by you, they can also be considered workplace ones since your employer can arrange one for you under the company’s collective pension plan.
Why opt into an occupational pension?
There are many benefits of joining your employer’s pension scheme.
- Saving for your pension is made easy – pension contributions are taken straight from your salary and invested for you to grow your pot
- an occupational pension is tax efficient – the Government contributes into your pension as a form of tax-relief
- State Pension is not adequate for a living in the UK; as of 2021 it is £179.60 per week. You need an extra pension pot – whether a workplace or personal – where you can save a bit more for a good standard of living
- your money is invested whether by you or by industry experts.
Generally, a pension is essential to anyone retiring whether it is with your employer or you arrange a personal one yourself. It ensures you have a stable income when you’re unable to work due to old age.
What types of workplace pensions are there?
Defined benefit and defined contribution scheme
A defined benefit pension scheme – or final salary scheme – is tied to your salary. In other words, your workplace pension is calculated based on your final salary you were paid by the end of your time with that employer and on the number of years you’ve worked for the company. Your pension is not based on pension investments, which means the value of it is stable and you know exactly how much you’ll get by the time you retire.
It is considerably less popular now to pay into your pension scheme based on a defined benefit scheme. Although they do provide a guaranteed monthly income it is believed to be a liability for corporations as there are extra costs that they are not aware of and that it is difficult to budget for.
A workplace defined contribution pension scheme on the other hand relies on your contributions and how well these are invested. Pension contributions are taken straight from salary before you receive it and added to your pension pot. Your pension provider then invests these funds which means, once you reach pensionable age and you decide to retire, the value of your pension will depend on the contributions you’ve made in the past as well as how well your investments have grown.In both schemes, both you and your employer pay into it a certain percentage each month – if auto-enrolled. You have to be auto-enrolled to the company’s pension scheme and your employer has to contribute by law, unless you do not qualify for auto-enrolment pension or you are earning less than the threshold.
Auto-enrolment pension scheme
Generally, it is the law for your employer to automatically enrol you to the company’s pension scheme. This is because a full State Pension can only cover a basic standard of living and it is not a substantial amount to live with. The Government wants to ensure that UK citizens have a backup plan when it comes to their retirement living.
To be eligible for an automatic workplace pension you need to:
- be classified as a worker and have signed a contract with your employer
- be between 22 years old and State Pension age (which varies depending on your age)
- you earn minimum £10,000 a year
- you work in the UK
For this pension, your employer contributes a certain amount depending on the agreement, as well as you before you get paid. The minimum total contribution is 8% of your qualifying earnings. Usually the employer contributes the minimum 3% and you the remaining 5%. You have the chance to opt out of it but it is always best to be enrolled in a workplace pension scheme.
Also, the Government contributes to your workplace pension as tax relief. In other words, the Government rewards those who have a pension by topping it up once you start receiving it, as a form of tax relief.
Does auto-enrolment apply to me if I’m self-employed?
Self-employed workers unfortunately do not have the benefit of having a workplace pension as they work for themselves and not working for an employer. They don’t have employment rights and responsibilities like employees do.
Self-employed have to arrange their own personal pension if they want to guarantee a retirement income at a later stage in life. Receiving only State Pension is not substantial for a good standard of living in the UK.
However, if a self-employed person is also employed by a company they are able to have both a workplace and a personal pension – as there is no limit on pension schemes you can have – or just a workplace one from their employer.
Although self-employed workers have to arrange their own pension they do get the same benefits from a pension as everyone with a pension, such as tax-relief from the Government.
Group personal pension – or workplace personal pension – is a workplace pension arranged by your employer. You join the workplace’s pension scheme but you have your own pension pot which you contribute to.
It’s similar to a personal pension that you arrange for yourself. You choose if you want one and when, and you contribute however much you have agreed with your pension provider. The difference is that you sign with the pension provider that your employer chooses and the investments are not controlled by you.
Contributions can be made from:
- your employer
- or both.
A stakeholder pension is a personal type of pension, such as a GPP, and because it can be arranged by your employer as well – or yourself – it can be classified as a workplace pension.
It is an individual contract signed with the employer’s pension scheme. Your employer does not have to contribute unless it is an auto-enrolment scheme.This type of pension is a considerably easy option as it must meet minimum Government standards, such as low and flexible contributions of a minimum of no more than £20, and a default investment strategy if you don’t want to make investment decisions.
When can I receive my workplace pension?
To start receiving your workplace pension, you’ll have to reach a minimum age of 55 as of 2021 (57 in 2028). However, the longer you work and contribute into your workplace pension the higher the payments you’ll probably receive.Although the earliest you can receive your pension is 55, people usually decide to receive their retirement income between 60 and 65.
How does an occupational pension affect your State Pension?
A workplace pension does not affect State Pension in any way. Contributions to your workplace pension are separate from your State Pension contributions, simply because you pay into your State Pension with NI contributions and credits, while a small percentage is deducted from your salary and paid into your workplace scheme.
It is possible to lose track of your pensions…
when you change addresses or change jobs. This is because it is very rare to remain working for the same company throughout your career, and by changing jobs you change pension schemes as well.
It is not lost forever, your savings and investments remain with that pension provider but are left behind with your previous employer. All you have to do is track and find the pot!
In some cases, you might be able to transfer your pension pot to your current pension provider; however, there are limits on the value you can transfer or it might not be possible with some pension providers. Check the rules and regulations before making a choice.
You need to update your pension provider every time you change address in order to be aware of the whereabouts of your pension.
How Husky Finance makes pensions easy for you
A pension needs thorough planning as early as possible. It is an essential part of saving for your retirement and your future.
Always ask your employer about the workplace’s pension scheme; they cannot refuse you to join but depending on your salary they might not contribute to it.
Husky Finance helps you stay in control of your pension with a simple app. You are now able to see exactly how much goes into your workplace pension scheme, how much tax you’re accruing and how your funds are invested and growing.
Start planning your retirement today.