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Workplace pensions explained

How do they work? Can I opt out? Read our handy explainer on workplace pensions

If we’re working in a staff job it’s very likely that our employer will have set up a workplace pension for us.

When we’re 22 or older and earn at least £10,000 a year there’s something called ‘auto-enrolment’. This means that our employer will set up a workplace pension for us unless we choose to opt out.

Nine in ten of us choose to keep paying into the pension though.

When it’s set up, some of our pay will be deducted before it hits our bank account. This money is paid into our pension. 

We can have a say in how much goes in, but it has to be at least five per cent of our ‘qualifying earnings’. (‘Qualifying earnings’ just means anything we earn over £6,240 up to a maximum of £50,270). 

Our employer will also pay in an agreed amount – at least three per cent of our qualifying earnings. This means that each month, at least eight per cent of our qualifying earnings are going into our pension pot.

(There are also upper limits on how much we can pay in. And some employers work out the percentages based on our whole earnings. If we’re unsure what’s happening we can ask our employer for more details.)

Free money

As well as the cash from our wages and the contribution from our employer, we’ll also get money from the government.

For every £100 we pay into our workplace pension, the government tops it up by £20.

This money would usually have tax taken off it before it gets to us. With a workplace pension however, our employer takes off this tax and sends our pension money to our pension provider.

The pension provider then gets the tax back from the government and puts it into our pension pot. So it’s as if we’d never paid the tax on that money.

(If we’re in Scotland and paying the 19 per cent rate of tax we’ll still get 20 per cent of the money added into our pension).

Should I pay in more?

The earlier we start saving into a pension, the more we’ll have to fall back on when we retire.

The same is true of how much we choose to put in. There are some benefits to paying in more than the minimum – if we can afford to.

There’s the tax relief for a start. Then there are the contributions from our employer, which is money that they wouldn’t otherwise give us.

Then there’s the fact that our pot will hopefully ‘compound’ over the years. This means that if we make interest on the pot, over time we could make interest on the interest. Think of it like a snowball effect.

Some other things to think about

If we earn less than £10,000 but more than £6,240 we can ask to be enrolled. Our employer has to let us join, and must pay into it for us.

And if we have a staff job (we have a contract of employment) and we don’t think we’ve been enrolled into a pension scheme we should try to find out why.

Our pension cash will be invested on our behalf. There’s no guarantee that its value will go up – it could also go down. But from looking at past trends, over the long time period that we’ll be saving into our pension we’d expect to come out with more than we put in.

Capital at risk. This information is not financial advice. The value of investments can go down as well as up and you could get back less than you invest.

Image: Mikhail Nilov / Pexels

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