A pension is a long-term investment. Its value can go down as well as up and could be worth less than was paid in. Laws and tax rules may change in the future. Your own circumstances and where you live in the UK will also have an impact on tax treatment.
How does a workplace pension work?
Workplace pensions are opened for you by your employer. For most workplace pensions, you are automatically enrolled if you meet certain criteria. See 'What is auto-enrolment?' below for full details.
The government will also make payments into some types of workplace pension, so it’s worth checking to see if this applies to your pension plan. If it applies to you, the Government payment is known as tax relief. You can also get more tax relief if you’re a higher or additional rate taxpayer, but you’ll have to claim for the extra relief. Tax benefits are different if you pay through salary sacrifice. See below for details.
The money in your workplace pension is invested into funds. The fund’s performance can potentially help your money grow over the long term.
You will usually only be able to take money from your workplace pension once you reach age 55 (rising to 57 from 6 April 2028). Like most types of pension plans, it’s designed to help you pay for life after work.
Types of workplace pension
'Defined Contribution' pension
- You pay in on a regular basis. If you’re a member of a workplace pension scheme your employer will typically pay in too
- The amount you get back depends on how much has been paid in, the performance of your investments and how you decide to take your money
- You can usually take money from this type of plan from age 55 (rising to 57 from 6 April 2028)
- Keep in mind that you’re responsible for your investment choices with this type of pension plan
'Defined Benefit' pension
- This is also known as a ‘final salary’ pension
- A defined benefit pension pays out a guaranteed income for life when you retire
- The amount you get when you retire depends on how long you’ve worked for your employer, your salary and the terms of the arrangement
- Depending on how your employer runs the pension scheme, you may be able to pay into this type of pension plan
- Your employer is responsible for the investment choices
What is pension tax relief?
With some types of pension plans, your payment will be topped up with tax relief. If you pay £80 into your pension plan, it’ll be topped up to £100 thanks to tax relief of 20%. If you’re a higher or additional rate taxpayer, you can claim more money back by contacting HMRC.
What is salary sacrifice?
It’s when you exchange part of your salary so your employer can pay into your workplace pension. It means both you and your employer will pay less National Insurance. In most cases, you should be a little better off with this option. Salary sacrifice reduces your salary and may affect other benefits, transactions and borrowing levels that are based on your salary.
What is auto-enrolment?
Auto-enrolment is when you are automatically signed up to a workplace pension. You may need to have worked at a company for a while before this happens and not everyone is eligible. If it’s offered to you, you can choose to opt out if you want although you could be missing out on the employer payments if you do. If you do opt out, it’s a good idea to have another way of saving for when you want to stop work.
To qualify for auto-enrolment you will need to meet the following criteria:
- Be between age 22 and state pension age
- Earn a salary at least £10,000 per annum
- Work in the UK with a contract of employment
How do I pay in?
Your payment is taken from your salary before it goes into your bank account. You can see how much you pay into your pension plan, each month, on your payslip. Sometimes you can see your employer’s monthly payments too.
Your employer might let you pay more into your pension plan. It’s worth looking into this, especially because they might match what you pay up to a certain limit. Talk to your employer about whether they match and how you can do this.
How much can I put in my pension plan?
While there’s no limit on the amount that can be saved into your pensions each tax year, there is a limit on the total amount that can be saved each tax year with tax relief applying and before a tax charge might apply. The limit is currently £60,000.
The annual allowance applies across all your pension savings, not per pension scheme. If you exceed it, a tax charge is made which claws back any tax relief that was given at source.
In addition, Standard Life will only accept payments that tax relief can be claimed on. This means you must earn at least the amount you wish to pay in the tax year you are making the payment for. So if you, for example, want to make total payments of £20,000 you must earn at least £20,000 in that tax year.
This doesn’t apply if your employer is making the payments on your behalf (either as a result of operating a salary sacrifice arrangement or are making payments directly into your pension arrangement). We can accept employer payments in excess of what you earn however please remember if the total payments paid into your pension exceed £60,000 per year a tax charge will apply.
You also need to keep in mind that a lower limit of £4,000 may apply if you are earning in excess of £200,000 a year or you've taken more than the amount you're entitled to take tax-free through flexible retirement income or as a lump sum.
If you think you might be getting close to your annual allowance, that it could be reduced or you might have exceeded it, consider getting advice from a financial adviser. There's likely to be a cost for this.
When can I take my pension money?
Usually, the earliest you can take your pension savings is after you reach 55 (rising to 57 from 6 April 2028). You can sometimes take it earlier if you are in ill health or have a protected retirement age depending on your occupation.
It’s important to keep in mind that not all pension plans will give you full flexibility over how you take your pension savings. You might need to transfer your money to another pension plan to use your preferred option.
Depending on the provider, there are different ways you can take your pension money. You can take a flexible income, have a guaranteed income for life (an annuity), take all or some of it as one or more lump sums, or choose a mixture of all these options. The choices you have may depend on how much money you have in your pension plan. Normally 25% of the money you take from your pension pot is tax-free. The rest is taxed as income.
Benefits of a Defined Contribution workplace pension:
- Your employer pays into it, so you get extra money from them.
- You benefit from tax relief on your payments.
- When you choose to take your pension money, normally 25% of what you take out is tax-free.
- You get potential investment growth.
- They can often have lower charges than personal pensions.
Pension transfers to a workplace pension
Most employers will allow you to transfer other pension plans to your workplace pension. Keep in mind that transferring isn’t for everyone. You also need to check whether these plans have valuable benefits and guarantees. You might not want to give these up.
If you have a Standard Life workplace pension, see if a pension transfer is right for you.