All about workplace pensions
What is it?
A workplace pension scheme is a tax-efficient method of saving for retirement that’s arranged by your employer. A percentage of your pay is taken from your salary and put into the pension automatically each pay day.
Why join?
There’s a lot of good reasons to make sure you’re a member of your workplace pension scheme. We’ve listed some of the key ones below:
1. You’re putting money aside to support your future.
The sooner you start, the more time there is for your money to grow!
2. Pension contributions are tax efficient
Once in the pension, your funds will grow free from income and capital gains tax. You also get basic rate tax-relief on your contributions. This means that for every £4 you contribute, £5 will go into your pension. For higher-rate taxpayers, you may be able to claim back more through self-assessment.
3. Your employer will make contributions on your behalf.
If your employer contributes (and they have to under auto-enrolment rules) you’re effectively getting free money into your pension.
4. You don’t even need to do anything.
By law, all employers must provide a pension scheme and enrol all eligible employees into it. This is known as auto-enrolment.
What is an eligible employee?
Eligible employees are those who meet the following criteria:
· Aged between 22 and State Pension age
· Earn more than £10,000 per year
· Work in the UK
If you meet these criteria, you’ll be automatically added to your employer’s pension scheme. If you don’t, you may still be able to opt in.
What do I have to pay?
The amount you pay will depend on the type of workplace pension scheme you’re in. If you’re in a defined contribution plan that follows auto-enrolment rules, the total contributions must be at least 8% of an employee’s qualifying earnings.
This is made up as follows:
· Employee contribution — 4%
· Tax-relief — 1%
· Employer contributions — 3%
Therefore, your contribution is effectively doubled. For every £1 you invest for your future, employer contributions and tax-relief mean £2 will go into your pension.
What are qualifying earnings?
Your qualifying earnings relates to the range of your earnings which benefit from pension contributions. In 2022/23 these are:
Lower limit qualifying earnings band: £6,240
Upper limit qualifying earnings band: £50,270
Your contributions are based on the amount of your earnings which come between these two figures.
The downsides
There are of course potential downsides. Once you’ve contributed to your pension, the funds can’t be accessed until the normal minimum pension age, at present this is 55 but it’s due to rise in the coming years.
Your money will be invested, and the underlying value may go down as well as up. It’s therefore very important to be aware of the funds you are invested in and to make sure that you are comfortable with the level of risk you’re taking.
So, should I join my workplace pension scheme?
Saving into a pension can be one of the most sensible financial steps you can take. Not only are you putting money aside to help provide for a comfortable future, but you’re also getting money from the Government and your employer to do so. Making this small investment each month can make a huge difference in later life.
Please be aware that your fund value may go down as well as up and you may get back less than you have paid in. This article is for informational purposes only, if you require specific recommendations on your own personal circumstances, please get in touch at www.thefuturefp.com
