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 – if you’re between age 22 and State Pension age, earn a salary of at least £10,000 per annum and if you work in the UK. If you qualify, you will be enrolled and your employer will pay into your pension plan. You will usually have to pay into it too.

HMRC 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 HMRC payment is known as tax relief. You can also get more tax relief if you’re a higher or additional rate tax payer, but you’ll have to claim for the extra relief. This does not apply if you pay into your pension plan through salary sacrifice.

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 55 (subject to change). Like most types of pensions, it’s designed to help you pay for later life when you’re not in full-time employment.

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Types of workplace pension

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‘Defined Contribution’ pension

  • You pay in on a regular basis. If you’re a member of a workplace pension scheme your employer will 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 pension from age 55 (subject to change)
  • Keep in mind that you’re responsible for your investment choices with this type of pension plan

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‘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

Find out more about different types of pension

What is pension tax relief?

With some types of pension plans, your payment will be topped up with tax relief. If you pay £100 into your pension plan, it’ll be topped up to £125 thanks to tax relief of 20%. If you’re a higher or additional rate taxpayer, you can claim more money back by contacting HMRC.

See what income tax you pay now

Other types of defined contribution pension plans work differently. For example, if you were to pay £100 in, the amount is deducted from your salary before income tax is calculated, known as salary sacrifice, so you get the tax benefit immediately. This means that higher or additional rate taxpayers don't need to reclaim anything from HMRC manually.

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, each month, on your payslip. Sometimes you can see your employer’s monthly contribution 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?

There’s a limit on how much you and your employer can pay into all your pension plans, each year. This depends on your type of pension plan and circumstances, but is generally based on your yearly earnings and is capped at £40,000 across all your pension plans. Very high earners or individuals who have started to take an income from their pension plan may find they have a lower allowance.

The minimum depends on the earnings definition chosen by your employer - for example, it can be 7% of total earnings or it can be 8% of what is defined as qualifying earnings between set amounts confirmed each year by the government. At least 3% of this has to come from your employer. Whatever the definition used, usually both you and your employer will be paying in.

Lastly, there’s a limit on how much you can save in your pension plan in your lifetime. If you go over this, you might get a tax charge when you come to take your money out. Right now, the ‘lifetime allowance’ is £1,073,100.

Find out more about pension allowances

When can I take my pension money?

Usually, the earliest you can take your pension savings is after you reach 55 (subject to change). You can sometimes take it earlier if you are in ill health and 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 money. 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 often 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.

Find out more about how you can take your pension money

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 contributions.
  • When you choose to take your pension money, 25% of what you take out is tax-free.
  • You get potential investment growth.
  • They can often have lower charges than personal pensions.

Important things to think about:

  • As with all types of pension plan, you can only take your money when you reach 55 (subject to change).
  • Investment risk, which means you might lose money.
  • Tax rules can change.

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 you can transfer another pension to it online.

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More about pensions

We have even more guides and insights to help you understand pensions.