Workplace Pensions Defined
As per the UK pensions law, an employer is supposed to set up an occupational pension plan to offer a sizeable pension pot for their personnel.
There are two types of workplace pensions:
The Defined Contributions Pension Scheme
It’s also referred to as the money purchase plan, and it’s a pension scheme where your pension provider invests your contributions in various asset funds like shares, bonds1, stocks, property, among others. The amount you receive when your retire is dependent on how your investments perform.
Defined Benefits Pension Schemes
It’s also referred to as the final salary scheme, and the amount you receive upon retirement depends on your income and the number of years you’ve worked for your boss. Your pension provider will offer you a specific amount each year when you give up working. Your pension fund isn’t based on the investments made. The number of employers providing the final salary schemes to their staff has declined in the past five years, even though they’re still widespread across the public sector.
How Workplace Pensions Work
Let’s get down to business:
The most modern occupational pensions are the defined contribution pension schemes. That practically means that the amount you receive upon retirement will be based on the amount you’ve been contributing to your pension plan and how the asset funds have performed over time.
When you relocate to a new firm or when your boss establishes a new pension fund, you’ll get information about the pension plan and figure out the percentage of your income that’ll be paid into your occupational pension scheme.
Your boss will then deduct your pension scheme contributions straight from your salary before they transfer them into your account. In most cases, your boss will also include some capital to your workplace pension, and the pension lender will add cash from the state in the form of tax relief (you receive tax relief of £25).
You can opt to set up a personal pension as well as an occupational pension. One of the main reasons for doing that is if you want to combine your old pensions, including those from your former bosses, into your newest pension scheme.
Defined Benefit Pensions
You might have a defined benefits pension scheme if you’ve been working at a prominent firm or in the public sector. If you have the final salary plan, the amount you get when you retire is usually dependent on how long you’ve been an active member of the pension scheme. It’s also based on your revenue (either your income upon retirement or an average of your wages during your working years).
With this pension fund, however, you need to ensure that you seek guidance from an independent financial advisor (IFA2). It’s especially vital if you have a final salary scheme that’s worth over £30,000.
Auto-Enrolment into Workplace Pensions
According to the new pension rules, bosses now have to automatically enroll a number of their personnel into a workplace pension plan. They’re also supposed to make a specific level of contributions to the fund. These will typically be defined contributions pension plans.
If you receive more than £10,000 every year and are aged between 22 years and the set state pension age, 66 years, you’ll undoubtedly be automatically enrolled in your occupational pension scheme. If you’d want to opt-out of the pension plan, you’ll have to inform your employer beforehand.
The least employee contributions are currently set at 5% of your qualifying remunerations, while the least amount of pension contributions your boss has to make is 3%.
Cashing in Your Workplace Pension
When you reach 55 years, you can do numerous things with the capital in your workplace pension scheme, just like you would with the personal pension scheme.
Got Questions? Check These First
Is A Workplace Pension Different From A State Pension?
Yes, it is. The workplace pension plan is a pension fund that’s set up by your employer, as required by the law. The state pension scheme, on the other hand, is one where the government ensures you get a specific amount of cash (€175.20 per week) when you hit the state pension age, which is currently set at 66 years.
Saving into a workplace pension scheme doesn’t have any impact on your eligibility to the state pension, and the amount you’ll receive from your state pension plan is dependent on your National Insurance Contribution Record.
Can You Get Your Workplace Pension Back?
Yes, you can. If you quit from your job just a month since your boss started contributing into your pension scheme, you’ll get back any capital that you’ve already contributed into your pension fund.
You might be able to receive your disbursements refunded if you decide to opt-out later. They’ll stay in your pension scheme until you stop working. You can also opt-out by contacting your pension lender.
Is It Worth Having a Workplace Pension?
Yes, it is. Workplace pensions offer you numerous benefits which include, but aren’t limited to:
- The pension plan allows you to make contributions
- Rather than having your cash going to the government in the form of income tax, with the workplace pension, you get to reserve some money for your future
- Unlike other pension schemes, your boss contributes some amount of cash into your pension fund
- You benefit from the €25 tax relief offered by the government
- You can choose where to invest your cash or entrust your pension provider to make the decisions
- You have the freedom to do whatever you’d want with your income after retirement
Who Pays into A Workplace Pension?
Typically, your employer pays into your workplace pension. However, in most cases, the occupation pension contributions are made by you, your boss, and also the government through some tax relief. As an employee, you always have the freedom to increase your pension contributions whenever you want to.
To sum it all up:
The UK government has recently announced that it is looking into the idea of a workplace pension scheme. There are many debates about implementing such a system and what benefits it would provide, but one thing seems inevitable. This change will impact future generations who may not be able to save up enough money for their retirement years.