How do workplace pensions work?
Scared or confused by workplace pensions? It’s really just a simple pay-as-you-go system of saving for your retirement. Take a look at Michelle’s story for an example of how it works...
Michelle* has pensionable earnings of £12,000 a year (£1,000 each month). This is her gross basic salary. Her employer’s pension scheme uses the following percentages to calculate the contributions:
- Michelle pays in 4 per cent of her gross basic salary.
- Her employer pays in an amount equal to 3 per cent of Michelle’s gross basic salary.
- The government contributes in the form of tax relief** equal to 1 per cent of Michelle’s gross basic salary.
Therefore, although Michelle puts in £40 a month, the total contribution to her pension is £80 a month.
What are the new rules?
- The law has changed so your employer has to enrol you into a pension at work.
- If you qualify, you’ll automatically get a workplace pension (see What do the changes to pensions mean for me?)
- Your boss will pay into your pension fund, and you’ll get tax relief** from the government.
- If you don’t want to be in the scheme you can opt out. But before you do, have a read of 10 reasons why it's a good idea to stay enrolled to see in what ways it could benefit you.
- You can’t take your money out of your pension until you retire, but you can stop paying into it if money gets tight.
- The money in your workplace pension pot is yours, even if you change jobs.
What happens now?
You don’t need to do anything. Just look out for a letter from your boss that tells you more, and speak to your employer/pension provider for your exact terms and conditions.
* In this example, Michelle’s employer is contributing more than the minimum required by the government under the scheme. This means someone earning £12k a year might receive a smaller contribution from their employer than the amount shown here.
** Tax relief means the money that would have gone to the government as income tax goes into your pension instead.
More pensions information
Read these tips on how to cut back your spending now so you can save for the retirement you want later
Find out how much money you, your employer and the government will be paying into your pension each month
Andy Smith explains why he’s been paying into a pension since he was 18, even when he was on a low wage