4th December 2015
We all like to feel that our futures are financially secure. Lately, many stories about pensions have primarily seemed negative and hopeless.
Recent changes to legislation have made a big impact on the future of pension schemes, affecting employers (and employees) of businesses of every size. These changes might provide some additional reassurance to workers that might otherwise have expected to be relying on the state pension during their retirement. Workplace pensions open retirement savings up to individuals that might otherwise not be pro-active enough to arrange a private pension, or might otherwise worry that they’re unable to contribute the funds.
What exactly is a workplace pension?
At its simplest, a ‘workplace pension’ is a pension (or retirement savings fund) that is organised by an employer.
Unlike private pensions that might be managed by separate companies with no employer input, a workplace pension (also known as a work-based pension or a company pension) is more closely linked to a job.
Workplace pensions are tied to an employer, but if a worker moves to a new job then they don’t lose the funds that they’ve already built up. They can still contribute to their pension, or can consider merging their old workplace pension with one at their new place of employment. Specific options will vary from provider to provider, and it’s also worth noting that certain pension benefits (like ongoing employer contributions) may no longer be offered. In certain cases, such as a relatively new employee moving on to a new company, a refund on pensions contributions may be available.
How is a workplace pension typically managed?
Usually, a workplace pension requires an employee to contribute a percentage of their salary. This will come out of their pay before they receive it, much like tax and National Insurance. As a result, many people find it fairly easy to do without the money. There will be no requirement to pay a Direct Debit out of your bank account, or to remember to pay into your pension pot each month. Everything will happen automatically.
The workplace pension comes with tax relief benefits, and a majority of employers also add their own contributions to an employee’s pension fund.
How can you ‘cash in’ a workplace pension?
Usually, workplace pensions can be accessed from the age of 60 or 65, and occasionally from 55 years of age.
Pension holders have the option to take 25% of their pension pot as a tax-free lump sum payment, to do with as they wish. The remaining pension is used to purchase an annuity, providing regular payments through retirement.
Do pension holders have to survive only on their workplace pension?
Workplace pensions are an additional pension, on top of the current state pension (which stands at a little over £100 a week for a single person).
Is a workplace pension protected?
Workplace pensions are protected in the usual way, by the Financial Services Compensation Scheme (FSCS). An employer cannot access pension pot money once it has been contributed.
How can an employee learn more about their pension?
Employees should receive an annual statement, including their pension pot total. In addition to this, an employee’s payslip will provide some pension details.
Tax relief happens automatically – an employee will either have lowered net pay, if their pension contribution is deducted before tax (regardless of the employee’s tax level), or will have tax relief applied after deductions (at the basic rate). The former of these options is the most beneficial for someone that is within a higher tax bracket.
What is workplace pension auto-enrolment?
A recent law was put into place to ensure that almost all employees receive automatic enrolment into a pension scheme.
In order to be automatically enrolled, an employee must be earning more than £10k per year and must be between 22 years old and State Pension age. The employer will then contribute in addition to the employee’s contributions, which are a percentage of their own salary.
Is auto-enrolment in place everywhere?
To ease complications associated with the new auto-enrolment requirement, the changes were introduced slowly. The largest companies, with 120,000 employees or more, had to act by October 2012. There have been many staging dates since, with remaining staging dates covering a majority of businesses with 30 or fewer employees. Some of the smallest businesses already need to comply with auto-enrolment requirements. Figures show that of the companies and businesses still to reach their pensions auto-enrolment stage, two thirds have four employees or fewer.
Studies have found that 66% of smaller businesses, yet to reach their auto-enrolment stage, have no workplace pension scheme in place already. This means that pensions auto-enrolment will be a big change for everyone involved, from managers and HR departments to the employees who will, for the first time, have a workplace pension to contribute to (and, eventually, to benefit from).
Statistics also demonstrate a need for the smaller businesses to have access to professional support. More than 25% of business owners/employers will be relying on their accountant to help them choose a pension provider.
What do workplace pensions mean for employees and employers?
Workplace pension auto-enrolment is intended to reduce the effort required to save for retirement.
The scheme makes building a pension pot an achievable goal for every worker, no matter what their personal financial situation, and aims to reduce the dependency of the retired population on state pension availability. The employee barely needs to think about their pension, since the money is automatically deducted from their paycheck. For an employer, there are a number of important decisions to be made in order to meet workplace pension requirements, though once the initial details are in place the process is easily replicated for any new employee.