A guide to workplace pensions

1. Introduction to workplace pensions

What is a workplace pension?

A workplace pension is a savings plan that’s arranged by your employer to help you put money aside for later in life. It is also known as an occupational pension or a work-based pension, and is different from the State Pension. 

Typically, your employer will also contribute to the pension scheme for you, and so will the government in the form of tax relief. Generally, there are two types of workplace pensions: Defined Benefit schemes and Defined Contribution schemes.

How does a workplace pension work?

Each payday, a percentage of your earnings is automatically put into your pension. Your employer will usually contribute to your pension, too, and you’ll usually also receive tax relief from the government. If you are eligible for auto enrolment (see below), your employer has a legal obligation to make contributions to your pension pot. The money put into your pension is invested, with the aim of making that money grow into a bigger pot by the time you retire. 

By nature, a pension is a long-term savings product, and it is designed to give a better financial return than if the money was simply kept in a savings or deposit account.

What is a Defined Benefit scheme?

Also known as a ‘final salary’ or ‘career average’ pension, the Defined Benefit pension has declined in popularity over the years. It is a scheme that gives you a guaranteed annual income every year when you retire, with that amount based on your salary, how long you’ve been a member of the employer’s scheme and the rules of the pension scheme. This kind of pension arrangement is more prevalent with larger employers and in the public sector. The responsibility for making sure that there’s enough money in the scheme to pay all its members lies with the employer.

What is a Defined Contribution scheme?

Defined Contribution pension schemes, sometimes known as money purchase schemes, are very common. They can be a workplace pension scheme, arranged by your employer, or a personal pension you set up yourself. 

If you are part of a workplace pension set up by your employer, you pay money in (usually deducted from your salary) and so does your employer, and it’s then put into investments by the pension provider. With a personal pension, you decide on how much and how often to contribute to the pot. 

A group of employees having a meeting around a table

A pension is a long-term savings product and the money that goes into your pension is invested for you. Depending on how those investments perform, the value of your pension savings can go up or down in the short term, but the aim is that they will show steady growth over time. At retirement, the value of your pension pot will depend largely on how much you invested while you were working and how well those investments have performed over the years.

2. Legal framework and compliance

What is auto enrolment?

Under the Pensions Act 2008, it became a legal requirement for employers to set up a workplace pension for their employees, and to automatically enrol those who were eligible into the scheme. This legislation came into effect in October 2012, with the rollout being completed in February 2018. (See A guide to auto enrolment for more information on auto enrolment, including employee eligibility, employer duties, contributions and tax relief).

Large and medium-sized employers were the first to implement auto enrolment amongst their workforce, but by June 2015 the new workplace pension legislation had rolled out to include smaller and micro-sized employers, too.

Employer auto enrolment obligations

If you are an eligible employee, your employer must make contributions towards your pension savings once you are enrolled into the workplace pension scheme. Even if you do not meet the eligibility criteria for auto enrolment, you still have the right to ask to join a workplace pension. In this situation, whether or not your employer has to make contributions towards your pension will depend on how much you earn. You can find out more in MoneyHelper’s article auto enrolment if you earn £10,000 a year or less.

When you join the workplace pension scheme, your employer will tell you important information (with details like contribution rates) and how to opt out of the scheme if you do not want to be a member.

Employee eligibility criteria – who should be enrolled into a workplace pension?

Automatic enrolment applies to employees who:

  • are not already in the employer’s workplace pension
  • are aged between 22 and the State Pension age
  • are earning more than £10,000 a year
  • usually work in the UK

If you meet these criteria, you should be automatically enrolled into your employer’s workplace scheme as soon as you start working at a new job. This is known as your employer’s duties start date.

How to join a workplace pension

If you meet the criteria detailed above, your employer has a legal obligation to enrol you into a workplace pension scheme and to pay into it. You can also choose to join the workplace pension scheme even if you don’t meet the eligibility criteria. However, if that’s the case then (depending on your earnings) your employer may not have to pay into your pension.

How much money do you have to pay into your workplace pension?

The amount of money you have to pay into your pension each payday will depend on the type of pension scheme you’ve joined. If the workplace pension is used for auto enrolment, there is a legal minimum amount that you and your employer will have to contribute (total minimum contribution) which equates to a percentage of your earnings. You can, of course, pay more than this percentage.

Since auto enrolment began in 2012, the total minimum contribution rate set has increased from 2% to the current 8%. At present, your employer must contribute at least 3% whilst you have to make up the remaining 5%. Your employer can choose to pay more than 3%, but if the amount they put in is less than 8% then you will still need to make up the shortfall in order to meet the total minimum contribution amount.

If you pay Income Tax and are also paying money into a personal or workplace pension, the government will usually contribute to your pension, too, by providing you with tax relief. 

3. Managing your pension

How is your workplace pension invested?

The money that is put into your pension gets invested into funds. Those funds will depend on the pension provider that your employer has chosen, but these typically invest your money into financial assets such as company shares in the stock market. By default, Smart Pension uses a predetermined investment strategy that puts your savings into a mix of funds that aren’t exposed to high levels of risk.

With Defined Benefit schemes, the employer is responsible for making all the investment decisions, so they decide on which funds to invest your money into and what levels of risk are involved. 

However, with Defined Contribution schemes like Smart Pension, you can choose to change where your pension savings are invested. You can let the pension provider manage your pension savings or you can manage your own investments, if you feel comfortable doing so and want a more hands-on approach. This will allow you to tailor your investments to better suit your needs and preferences, and align them to match your ‘appetite for risk’.

Listed below are some of the advantages and disadvantages of having your workplace pension managed by the provider.

The funds are chosen for you and managed by experts
You cannot choose where your money is invested
Automatic movement to lower risk investments
You cannot choose when to move/change your investments
Choose how sustainable your investments are
Investment choices may not always be suitable

Advantages of having your pension managed by the provider

The advantages of having your pension managed by your provider, using their own investment strategies, include:

The funds are chosen for you and managed by experts

Your money is managed by experts. You won’t have to worry about selecting funds as they are chosen for you and your money is invested in a range of different funds for diversification.

Automatic movement to lower-risk investments

Your money is automatically moved into lower-risk investments for you as you approach your selected retirement age (that’s why it’s important to keep your provider aware of your planned retirement age).

Choose how sustainable your investments are

You can usually choose how sustainable you want your investments to be. Most providers offer funds which invest according to ESG (Environmental, Social and Governance) principles, so your money is invested in ways that help the world around us as well as delivering a financial return.

Disadvantages of having your pension managed by the provider

The disadvantages of having your pension managed by your provider, using their investment strategies, include:

You cannot choose where your money is invested

You’re not choosing where your money is invested. Another investment fund might be more suitable for your goals or risk preferences.

You cannot choose when to move/change your investments

You also can’t choose when to move or change your investments. The movement of your investments is done automatically and doesn’t take market conditions into account. If you prefer a more hands-on approach and more flexibility in where you invest your savings, then perhaps having your workplace pension savings managed by the provider isn’t for you.

If you’re unsure about making investments or what your pension options are, it’s a good idea to use MoneyHelper to seek advice from a qualified, independent and regulated financial adviser.

If you’re unsure about making investments or what your pension options are, it’s a good idea to use MoneyHelper to seek advice from a qualified, independent and regulated financial adviser.

Topping up your pension with a single contribution

An easy way to boost your pension savings is to make an extra single contribution when you can afford to do so, as and when you like. You may have come into some inheritance or received a work bonus which gives you spare money to invest into your pension. Making a supplementary payment like this can help to build your pension pot more quickly than by just relying on your regular contributions.

Tools like Smart Pension’s Retirement needs calculator can help you decide how much you’ll need to save into your pension by working out how much you’re likely to need in retirement. The tool will give you a rough idea as to how much you’ll need to make in additional contributions towards your pension (above the minimum required amount) to achieve the amount you’ll need for your retirement.

It’s worth noting that there is a limit to the amount that can be saved into your workplace pension each year whilst still receiving tax relief. This is known as your annual allowance. If you exceed this amount, tax charges may apply. Make sure you are aware of the pension tax annual allowance limits and rules before making additional contributions.

Check in on your pension savings

It’s important to check in on your pension savings on a regular basis, so that you have an understanding of the income you can expect to receive when you retire. Your own financial goals for retirement may change, and the value of your pension savings may grow more quickly or more slowly than you expected. Keeping on top of your pension savings will allow you to make adjustments to keep you on track to achieving your financial goals for retirement. 

A person's hands holding a mobile phone using the Smart Pension app

The Smart Pension app makes it easy to keep an eye on your pension. It gives you real-time information about your savings – how much you’ve got saved and how much both you and your employer have contributed. Using basic assumptions, it can also tell you how much your pension is likely to be worth when you are ready to retire. The Smart Pension app also allows you to make instant changes to your account and the way your savings are invested.

What happens to your pension when you change jobs?

If you move to a job with a new employer, your workplace pension savings from your previous employer will still belong to you. You may wish to leave these savings in your old employer’s scheme and access them once you reach retirement age. Meanwhile, you can join a new workplace pension with your new employer. 

Alternatively, it is often possible for you to transfer your pension savings from previous jobs  over to your new employer’s workplace pension scheme. This may not be possible for all schemes, so it is best to speak to your pension provider and/or an independent financial adviser about your options. 

It is also often easier to keep on track with your retirement goals by having all your pension savings together in one place. Being a member of just one scheme could mean that you save on fees, as you may have to pay only one set of charges rather than many. It could also mean that you spend less time on personal admin, as you’ll only have the paperwork for one pension to deal with.

How to trace your old or lost pension savings

If you have worked for different employers in your career, you may have accumulated pension savings with a number of different pension schemes. It’s all too easy to lose track of them, but finding any lost pensions is an easy way to boost your retirement savings. See Smart Pension’s find your lost or forgotten pensions page for more information. 

If you are interested in tracking down lost pension savings from previous jobs, the government has a free pension tracing service which may be able to help, even if you don’t know if your old employer had a pension scheme. To get started, you’ll need to provide the name of your previous employer or the pension provider, along with any additional information such as the dates involved.

How to combine all your pension savings into just one pension

For the reasons explained above, it can often be a good idea to move all your pension savings from previous employment into one place. This is also known as consolidation. If your employer’s workplace pension scheme is with Smart Pension and you would like to move your pension savings from a previous employer, we’d recommend reading  A guide to transferring your pension for more information.

There are also a few factors you should weigh up before making the decision to transfer your pension savings, including:

Transfer charges

Some providers will charge an exit fee to move your money out of their pension scheme, so you could end up with less money than you thought.

Safeguarded benefits

It’s best to check whether there are any special pension benefits that you may potentially lose out on if you choose to transfer your savings out of the scheme.

Protected benefits

It’s also worth checking to see whether you have any protected benefits (for example, a tax-free cash lump sum entitlement above the 25% limit) that could be lost if you choose to transfer your pension savings from the scheme.

Retirement options

From annuities to drawdowns, not every pension scheme offers every option to access your pension savings, so it’s worth thinking ahead and checking.

It’s often a good idea to speak to an independent financial adviser before making any decision about transferring pension savings.

4. Taxation and benefits

Tax relief on workplace pension contributions – What is tax relief?

One of the benefits of saving into a workplace pension is the tax relief you could receive. 

It’s effectively free money back from the government, to encourage people to save for their retirement. As a scheme member, you get tax relief on your contributions at the highest rate of income tax you pay. 

HM Revenue & Customs

There are two main ways in which your employer collects the contributions you make for your workplace pension – net pay and relief at source. Your employer decides which method to use and the chosen method is used for all employees of the scheme.

What is a net pay arrangement?

​Under a net pay arrangement, your pension contributions are deducted ‘gross’ – from your salary before tax is taken into account. As a result, you’ll only need to pay tax on the remainder of your earnings (minus the pension contribution), which would usually be less. Smart Pension uses a net pay arrangement, rather than a relief at source method. 

​A net pay arrangement will not provide a 20% tax credit to employees earning below their relevant personal allowance for Income Tax.

What is relief at source?

An alternative method for paying pension contributions is under what HMRC calls ‘relief at source’. In this arrangement, your pension contribution is taken from your ‘take home’ pay after your salary has been taxed in the normal way (with deductions for Income Tax and National Insurance).

Whichever system your employer uses, if you’re a basic rate (20%) tax payer then your pension provider will then top up your pension contribution by 20% (the same amount as tax relief) and claim that back from HMRC. (If you’re a higher rate tax payer, you may have to claim the additional tax relief directly from HMRC, usually through a self-assessment tax return.)

For more information about tax relief on workplace pension contributions, see HMRC’s Pensions Tax Manual

Salary sacrifice and your workplace pension

Salary sacrifice, sometimes referred to as ‘salary exchange’, is a government-backed scheme under which you agree to ‘sacrifice’ a portion of your salary in exchange for a non-cash benefit. This could be, for example, a company car, a bike, a gym membership or even more in employer pension contributions. As the amount sacrificed is not subject to tax, this agreement effectively reduces your pay, meaning that you pay less Income Tax and National Insurance (NI). Your employer also makes NI savings.

The amount you decide to sacrifice should be how much you are willing to put towards your pension in addition to the minimum auto enrolment contributions. Depending on how much you do decide to sacrifice, paying less in NI can mean an increase in the pay you take home. In some cases, although there is no obligation on their part, employers will contribute part or all of their NI savings towards your pension, too.

Below are some of the advantages and disadvantages of using salary sacrifice for pension saving.

Pay less in taxes
Lower borrowing potential
More take-home pay
Less life insurance cover
More pension contributions
Reduced workplace benefits

Advantages of using salary sacrifice for pension saving

Pay less in taxes

By sacrificing part of your salary, you are effectively reducing your taxable income. A smaller income means less to be paid in terms of Income Tax and National Insurance.

More take-home pay

Depending on how much you choose to sacrifice, by paying less NI and tax you could take home more money each payday.

More pension contributions

As well as having more money in your pension from the earnings you sacrifice, you can also choose to add any additional pay, as a result of tax savings, to your pension. Your employer may also choose to pass on all or some of their NI savings to your pension, although they are not obliged to do this.

Disadvantages of using salary sacrifice for pension saving

Lower borrowing potential

Having less in take-home pay could affect how much money you can borrow. However, most loan and mortgage providers will take salary sacrifice into consideration when it comes to assessing affordability.

Less life insurance cover

Some employers offer ‘death in service’ cover, under which the amount paid out if you die is a multiple of your salary. If your employer offers this benefit, it’s worth knowing whether the figures involved are based on your salary before or after salary sacrifice.

Reduced workplace benefits

Some benefits, for example Statutory Maternity Pay, are tied to your salary, so a lower amount on your payslip could have a knock-on effect on the value of these benefits.

5.Retirement and accessing your pension

Pension age –  when can you access your pension?

Currently, anyone aged 55 and over will usually be able to access their workplace pension savings, whether they have chosen to retire or not. You may be able to access them earlier than this if you are suffering from ill-health – in this case, you’ll need to check your pension scheme rules.

A person using the Smart Retire app on a mobile phone

Things are slightly different when it comes to accessing the State Pension. Current legislation says you can access your State Pension (assuming you have paid enough in contributions and for a qualifying number of years) at the age of 66. This applies for both men and women, but this age qualification is set to increase gradually from 2026 onwards.

Options for accessing your pension pot

There are a number of different ways you can access your pension savings and these may vary depending on your workplace pension provider. Not all pension schemes and providers will offer every option available to you, so you may need to consider transferring to another provider to access the option that works for you. 

What you choose to do will depend on your own personal circumstances and what’s best for you, but it's always best to seek advice from an independent financial adviser to understand all of your options.

You can choose to:

Retire but take your pension savings later

If you don’t need your pension savings now, you can become a ‘deferred member’, meaning that you stop contributing to the pension but the money  saved in it continues to be invested and managed by the provider. 

Keeping your pension savings invested will give your money a chance to grow further, but naturally the value of your pension could go down as well as up.

Take your pension savings all in one go or as a series of lump sums

You can take your pension savings as cash in a single lump sum. If doing so, a quarter of your pension savings will be tax-free and the rest will be taxed as income. Bear in mind that an effect could be that you fall into the higher tax bracket for the year.

Another option is access your pension savings in a series of smaller lump sum payments over time, depending on your tax bracket and the timing of the tax year.

Purchase an annuity

An annuity is a financial product that provides you with a guaranteed, regular income when you retire. It’s sometimes referred to as a ‘lifetime pension’ because income is often paid out for the remainder of your life (or for an agreed period of time).  There are many types of annuities on the market, and you don’t have to purchase it from your pension provider.  

You can use all or some of your pension savings to purchase an annuity – a common option is to take 25% of your pension savings as a tax-free lump sum, and use the remainder to buy an annuity. 

However, once you have decided on the level of income you’d like to receive and purchased an annuity, you cannot change your mind or switch providers, even if there is a change in your circumstances. Therefore it’s important to explore all of your options to find out which of them will be most suitable for you.

Choose an income drawdown product

Income drawdown, also known as ‘pension drawdown’ or ‘flexi -access drawdown’ is a more flexible financial product that allows you to access your savings as and when you need them, whether that’s monthly, yearly or as a single or series of lump sums. Until you take them, your pension savings remain invested, usually in the stock market, and have the potential to grow if your chosen investments perform well. 

As with an annuity, you can access the first 25% of your savings tax-free. Any money you withdraw as cash from the remaining 75% will be subject to tax. Income drawdowns can be a more expensive option, in terms of ongoing charges, so it’s important to consider the fees associated with it when considering whether it’s the right option for you. 

Discover Smart Retire

Smart Retire is an innovative retirement product that gives you the flexibility to plan and manage your pension savings in a personalised way, so that you can have a sustainable income in your retirement. 

With Smart Retire you can:

  • get a regular income for some or all of your retirement
  • put money aside to access when you need it or to put aside as an inheritance
  • take 25% as tax-free cash when you join
  • use our investment strategies to help your money grow
  • adapt the plan as much as you want, as your needs change 

To learn more about if Smart Retire could work for you, visit smartretire.uk.

Further information

For employers, if you would like further information about workplace pensions, visit the Smart Pension website. You’ll be able to find information on how to set up an auto enrolment workplace pension and, if you are considering moving from your current pension provider over to Smart Pension, you’ll also find details on how to switch your pension provider

If you’re a financial adviser looking for a workplace pension solution for your clients, visit Smart Pension’s dedicated adviser page. If you’re a payroll service provider wanting to help your clients with their auto enrolment responsibilities, the Smart Pension website has lots more information on how to set your clients up with the online platform.

Our A guide to auto enrolment also offers more information about auto enrolment.