Pensions and employees
Pensions are a way of making sure you get a regular amount of money coming in during retirement.
The UK Government gives tax relief on contributions you pay in to pensions. The idea is to encourage people to provide for their own retirement rather than rely on the state.
Growth in your pension savings is generally free of tax. When pensions are paid out to you they are taxable, but you should be able to take some part of the pension as a tax-free lump sum.
This page gives you some basic information on pensions, concentrating on those pension schemes that you are most likely to be invited to join. You can invest in a pension of your own choice, without any contribution being made by your employer – a personal pension. You can find out more information on those pensions, if you wish, by visiting the Pensions Advisory Service.
We cannot advise you as to which type of scheme might be best for you. We cannot advise on whether or not you should pay into a particular pension.
If you are an employee, you may have the option of different kinds of pension. You may pay into some of them automatically; you have to make an active decision to pay into others. You do not necessarily have to choose between pensions – you may be able to pay into more than one kind.
We look briefly at some of the main types that you may be able to have, but if you want more information on any of them, we suggest you go to our ‘Tax Essentials' section.
What is the State Pension?
The Government pays the State Pension as a regular payment to eligible people who have reached State Pension age. You can work out when you will reach State Pension age by using the calculator on the GOV.UK website.
If you reach state pension age on or after 6 April 2016, you will fall under the flat rate state pension, known as the new state pension.
If you are an employee, and you earn more than a certain amount per week or per month, you will either be credited with National Insurance contributions (‘NIC’) or pay NIC. The NICs you pay help you to qualify to receive the State Pension.
There is more information about the state pension and the new state pension in our 'Tax Essentials' section.
What are occupational pensions?
An occupational pension, sometimes called a ‘works’ pension, is a pension scheme organised by your employer.
Occupational schemes are becoming increasingly rare and many are closed to new joiners. Your employer is more likely nowadays to offer you access to a group personal pension arrangement than a traditional works pension.
The scheme may be either a defined contribution scheme, also known as a money purchase scheme, or a defined benefit scheme, also known as a final salary scheme.
If you are a member of an occupational pension scheme, your employer is likely to contribute to it. If your employer makes a contribution to your occupational scheme, it is a tax free benefit for you.
Generally you can make extra payments of your own into the employer’s scheme. These are often called additional voluntary contributions (AVCs) or freestanding additional voluntary payments (FSAVCs). There are limits on the level of payments that can be made with tax relief, but these do not impact upon people on low incomes.
If you make contributions to an occupational scheme, your contributions are probably taken from your pay before your tax is worked out, so you get tax relief immediately, provided you are a taxpayer. For example, if you pay tax at the basic rate of 20% and authorise a monthly contribution of £50, the actual cost of the contribution to you will be only £40, and you save tax of £10 (£50 at 20%).
Most employers now have to have an ‘auto-enrolment’ pension scheme. This means that they have to automatically enrol eligible workers into a qualifying pension scheme, if they are not already in one.
Employers are joining the scheme between 2012 and 2018, and so most employees will gradually have been phased in already.
Auto-enrolment works alongside a scheme called ‘NEST’ (National Employment Savings Trust). This is a UK-wide pension plan backed by the Government, which is intended to act as a top-up for the state pension.
If you meet certain conditions, your employer either has to enrol you in a ‘NEST’ pension, or put you into the company's existing pension plan, provided that the plan is as good as a NEST pension. NEST has its own website providing more information.
Through auto-enrolment, you may find yourself with a pension plan for the first time. You will be building up a pot of money for your retirement in a pension plan, which could also be receiving contributions from your employer and the government. This should increase your overall pension savings for the future.
It also means you could see a reduction in your take-home wages, as you will have to contribute to the pension unless you opt out (or unless your employer pays all of the minimum contributions due under the auto enrolment scheme, but most employers will expect you to pay in).
Am I an eligible worker for auto-enrolment?
Most employees will automatically be enrolled into their employer’s pension scheme, unless they actively opt out, by saying that they do not wish to join the pension scheme.
Employers must automatically enrol all staff who are:
- aged 22 to state pension age
(You can work out when you will reach state pension age by using the calculator on the GOV.UK website.)
- working in the UK – under a contract of employment
(Note: people working on an independent basis may also be covered if they provide their services personally and cannot send a substitute. These people are known as "workers" for employment law purposes.)
- earning over £10,000 a year (in 2018/19).
If you fall into this definition, your employer has to automatically enrol you and pay the minimum legally required level of contributions (unless you opt out). This will be based on a percentage of your earnings.
It is possible for an employer to legitimately postpone offering a pension scheme to their staff for up to three months, meaning that if you are with an employer for a very short period only, for example in a seasonal job, you might not be offered auto-enrolment, even if you are otherwise eligible. But note that you can choose to opt in to the pension scheme during this period.
If you do not initially meet the eligibility criteria to be automatically enrolled, you may do at some stage in the future, for example if your earnings change. Your employer must monitor you and if you become eligible for automatic enrolment at a later date, enrol you at that point.
What happens if I was already in a workplace pension before auto enrolment?
There may be no changes, depending on the type of scheme your employer had in place before. Pension contributions will still have to be deducted through the payroll for those employees who have schemes in place when the rules are changed. You might have to pay in more in future to the pension, or your employer might have to start adding contributions to your plan.
Can I opt out of auto-enrolment?
You can opt out of a scheme, and provided this is done within one month of joining, any contributions made should be refunded. You may ask to rejoin the scheme at a later date.
Your employer cannot:
- encourage or force you to opt out of the scheme
- unfairly dismiss or discriminate against you for staying in a workplace pension scheme
- imply that someone is more likely to get a job if they choose to opt out of the pension scheme
- close a workplace pension scheme without automatically enrolling all members into another one
What if I am not eligible for auto-enrolment?
Certain other staff can ask to join a pension scheme, even if they have not been automatically enrolled. Your employer may have to pay into it on your behalf depending on whether you are a ‘non-eligible jobholder’ or an ‘entitled worker.’
- Non-eligible jobholders – for example those aged 22 to state pension age, earning from £6,032 (in 2018/19) to £10,000 or those aged 16-21. These workers are entitled to opt in, with an employer contribution.
- Entitled workers – for example those earning under £6,032 (in 2018/19). These workers are entitled to join a scheme but are not entitled to an employer contribution if they do so.
You can find more information about this on the Pensions Advisory Service website.
We have produced a factsheet on ‘Pensions Automatic Enrolment' that summarises some useful information.
I have concerns about auto-enrolment; what can I do?
If you are concerned about the way your employer is dealing with automatic enrolment or managing your workplace pension, you can contact The Pensions Regulator. There is more information on The Pensions Regulator website.
Provided your pension scheme provider agrees, there is no limit on the amount you can put into your pension. The tax relief you can get may be limited, however.
You can save in more than one pension scheme at the same time, for example, in both a personal pension and an occupational pension.
For more information on the rules for pension contributions, including tax relief and the annual and lifetime allowances, go to the ‘Tax Essentials section’.
One point to note is that if you are a low-earner, you may wish to check which type of pension scheme your employer uses. If they use a ‘relief at source’ arrangement, the pension provider claims 20p tax relief back from HM Revenue and Customs (HMRC) for every 80p of your contribution received – no matter what the level of your earnings. This means that when you contribute 80p, £1 goes into your pension pot. Some pension providers do not use this method, and use a different approach to tax relief (called ‘net pay arrangements’), meaning employees do not get any tax relief if their earnings are less than £11,850 in 2018/19.
Generally, the earliest you can take your other pensions is at age 55.
For occupational pension schemes, your employer’s scheme rules give you details on pension age, but this will probably be around 55.
If you are a member of a pension scheme set up by your employer and you leave your job – but you are not retiring – the pension savings that have built up are still yours.
You may have various options available to you, including:
- leaving the pension where it is and drawing it when you retire
- continuing paying into the pension after you leave
- transferring the pension to a different pension scheme
- getting a refund of your pension contributions
- starting to take your pension.
You should always contact your pension scheme administrator to check the rules.
We suggest that you also seek independent advice before making a decision, as it may affect the amount of your future pension income.
Some pension schemes allow you to transfer all or part of your pension pot to another pension scheme for you. Before making a transfer, you should check that both pension schemes will allow the transfer.
You might want to transfer your pension fund for various reasons. For example if you have had several different employers, and as a result have a few small pension pots, you might want to bring them together. This might make administration and organisation easier for you in the future.
The decision to transfer a pension pot is not one you should take lightly, as you may incur charges and lose some rights.
There is more information on the GOV.UK website.
As with all important investment decisions, we suggest that you seek independent advice.
If you have to give up your job because of illness, you might be able to get your pension before the usual age limit of 55 (but not your State Pension).
You must meet the criteria for ill health set by your pension scheme, and in addition, you must meet HMRC’s rules. HMRC’s conditions are on the GOV.UK website.
If you do not meet the conditions and you receive pension income before you reach 55, you will have to pay tax at a rate of at least 40% on the ‘unauthorised payment’.
You cannot get your State Pension before you reach State Pension age.
Serious ill health
If you retire from your job due to serious ill health, you might qualify to take all your pension pot as a lump sum. Again, you must meet certain conditions, which are set out on the HMRC website. The conditions include that you must have evidence from a doctor confirming that you are not expected to live for longer than a year.
See our 'Tax Essentials' section for a list of more sources of information.