A Beginners Guide to Workplace Pensions

A Beginner’s Guide

to Workplace

Pensions

1

Pensions can often seem confusing, particularly if you have never had one

before! However, at the end of the day a pension is simply a tax-efficient

savings arrangement designed to provide you with money when you stop

working. If you are an employee, then in most cases if you pay in, your

employer will too!

What is a

pension?

2

There are lots of different types of pension in the UK but the majority

of workplace pensions are usually what is known as defined

contribution or money purchase pensions. Under this type of

arrangement you will have your own pension pot which will be made

up of the money you pay in, the money your employer pays in on

your behalf, any tax relief and investment returns you receive. In

simple terms this means that what you will get out at the end of the

day will depend upon what has been paid into the pension and how

big the pot is when you come to take the benefits.

Some of the most popular workplace pensions are Group Personal

Pensions or Group Stakeholder Pensions. Another type of popular

workplace pension is a trust-based occupational pension. NEST and

other multi-employer pensions are trust-based occupational

pensions. However, from an employee’s point of view there is very

little difference between these types of arrangement.

What different types of

pension are there?

3

The State Pension has changed for anyone who reaches their State Pension

Age on or after 6th April 2016. You can find out more about the State Pension

via the following link:

http://oneeb.co.uk/state-pensions/

What about State

Pensions?

4

In most cases, if you pay into a pension, your employer will also pay in on your

behalf. If you don’t join your workplace pension, you could be missing out on

extra money from your employer.

You will also receive tax relief on the contributions you pay. With most

workplace pensions, you will automatically receive basic rate tax relief which is

currently 20%. This means for every 80p you pay in, the government will pay

another 20p into your pension.

If you are a higher rate or additional rate tax payer, you can also claim further

tax relief although you may need to apply to HM Revenue and Customs to

receive this.

If you aren’t paying into a pension it is important you think about what will

replace your salary when you stop working. On average men will live to age 83

and women will live to age 85 but life expectancy is increasing. This means you

could spend many years in retirement. If you want more than State benefits,

you may need to start saving.

Why should I join a pension?

5

The earlier you can start paying into your pensions the better. Let’s assume

you want to build up a pension pot of £100,000 when you are 70. Assuming a

5% investment growth rate is achieved how much will you need to pay into the

pension?

The above figures are just to give you an idea of how starting your pension

early might benefit you. Inflation will also obviously have an impact on how

much £100,000 is worth in 50 years’ time but clearly, the sooner you start

paying in the better.

When should I join a

pension?

If you start paying in age 45, you might need to pay £233 each month

If you start paying in age 35, you might need to pay £135 each month

If you start paying in age 20, you might need to pay £72 each month

6

There is no set answer to this question

as it really depends upon how much you

want to receive when you stop working

and how much you can afford to pay

now. If you haven’t paid into a pension

before, work out how much you can

afford to save each month and start

from there. Most modern pensions are flexible, so you can usually increase or

decrease the amount you pay in future if you need to. Bear in mind however,

that once you paid money into your pension, you can’t usually take this out

until you are at least age 55. You may also want to think about how increasing

and decreasing the amount you pay in will impact on how much your employer

pays in. Speak to your employer to find out more.

The money you pay into the pension will

be invested. Depending on how your

pension operates, your money could be

invested in stocks and shares,

commercial property, cash, bonds or a

combination of assets.

With most workplace pensions, your

money will usually automatically be invested in a fund or investment profile

selected by your employer. In most cases you should be able to select an

alternative investment, or investments, if you wish.

How much should I pay into a pension?

What happens to the

money I pay in?

7

Most workplace pensions

operate a simple charging

structure which is usually

expressed as a percentage of

the fund value. This is often

referred to as the Annual

Management Charge or AMC.

By law, your employer may

need to automatically enrol you

into a suitable pension

arrangement if you meet

certain criteria. At the moment

this criteria is that you are aged

between 22 and the State

Pension Age (currently 65) and

earn at least £10,000 a year. If

you meet this, then your employer must put you into a pension and provided

you continue to pay in, your employer must pay in too.

Whilst the legislation was introduced in stages initially, it now applies to all

employers. Any new employers must comply with legislation immediately.

What are the

charges?

What is auto-

enrolment?

8

You can usually access the pot you have

built up in your pension at any time from

age 55 onwards. You don’t need to retire

in order to take the benefits but you

should note that this minimum age is due

to increase in future. The first increase is

due in 2028 when the minimum age will

increase to 57.

You can find out more about your options at retirement via the following link:

http://oneeb.co.uk/guides/your-retirement-guide/

Under current legislation you can take your money out of your pension in a

number of different ways. These include taking benefits as a cash lump sum,

receiving a secure fixed income or a flexible income. You can find out more

about these options via the following links:

http://oneeb.co.uk/guides/your-retirement-guide/

http://oneeb.co.uk/guides/retirement-options-at-a-glance/

When can I take

money out of my

pension?

How can I take money

out of my pension?

9

It’s up to your employer to set the rules regarding how much you need to pay in order to

receive the employer contribution (although there are certain minimums imposed by law if

you employer needs to comply with automatic enrolment legislation). Remember that you

receive tax relief on the contribution you pay so it could cost you less than you think.

Let’s assume you have to pay 5% of basic salary and your employer pays 3% into your

pension on your behalf. Here’s what it might cost you each month:

Basic salary Amount taken from your salary each month

Amount invested into your pension each month, including the contribution from your employer and tax relief

£10,000 £33.33 £66.67

£15,000 £50.00 £100.00

£20,000 £66.67 £133.33

£25,000 £83.33 £166.67

£30,000 £100.00 £200.00

In some cases, your employer may be willing to pay in more if you pay in more also. Make

sure you are aware of what you need to pay into the pension to get the maximum from your

employer.

What is automatic

enrolment?

How much will a pension

cost me?

10

The information contained in this document is based on One Employee Benefits’ understanding of

the legislation as at September 2019. This document is for information purposes only and does not

constitute advice.

Registered in England Number OC423047.

Registered Office: Sunfield Business Park, New Mill Road, Finchampstead, Berkshire RG40 4QT.

One Employee Benefits LLP is authorised and regulated by the Financial Conduct Authority.

One Employee Benefits LLP

Sunfield Business Park New Mill Rd

Finchampstead Berks

RG40 4QT Tel: 0118 9734420