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The New Workplace Pension Scheme

Jobsharing: How does it work

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You may have heard people talking about the new Workplace Pension Scheme which came into force in October last year, but what exactly is it and how does it work?

How does the Workplace Pension Scheme work?

Millions of workers will be automatically enrolled into a pension scheme through their employer over the next few years to help them save for retirement.

It means companies will have to provide a scheme for their workers and pay into it. You will also have to contribute directly out of your pay packet and the Government will pay towards it in the form of tax relief.

You can opt out, but the new workplace pension is an easy and cost-effective way of putting money aside for the future.

The amount employees have to contribute will rise gradually to a minimum of four per cent of their ‘qualifying earnings’ by 2018. A minimum of three per cent will be paid by your employer and one per cent by the Government.

Workplace Pensions Karen Brady

‘Qualifying earnings’ means either the amount you earn before tax – between £5,668 and £41,450 a year – or your entire salary or wages before tax. Your employer chooses how to work this figure out. You can both pay in more than the legal minimum and you may be able to pay in less than the four per cent as long as your employer’s contribution means that at least the minimum has been met. The pot builds up each payday. For example, if you pay in £40, your employer will pay £30 and £10 will be added in tax relief, resulting in a total of £80 per month being added to the fund.

What if your employer hasn’t enrolled on the scheme?

If you haven’t heard anything about a workplace pension yet, that’s because only the largest companies are joining the scheme initially. All other companies with fewer than 120,000 employees will gradually sign up over the next five years. So depending on the size of the firm you work for, you may not actually be enrolled until 2018. You should be sent a letter by your employer when you have been added to the scheme and you can then opt out if you want to. The money paid in will be used to pay you an income for the rest of your life once you start receiving the pension and you may be able to take some as a tax-free lump sum when you retire. If the amount you’ve saved is quite small, you may be able to take it all as a lump sum; 25 % will be tax free. This cash could make all the difference to your lifestyle – currently the basic State Pension is £110.15 a week for a single person.

Under the new auto enrolment law, employers must automatically enrol workers who are aged between 22 and State Pension age, earn more than £9,440 a year and work in the UK. If you are already in a workplace pension scheme and it satisfies the criteria of the new system, then you may not see any changes at all. There are two main types of workplace pension and your employer can decide which you are offered.

Defined Contribution Pension Schemes

Also known as ‘money purchase’ schemes; the money is invested by a pension provider chosen by the company. The amount you get upon retirement usually depends on a number of factors:

  • How much has been paid in
  • How long you’ve been paying in
  • How well the investment has performed

The value can go up or down in the short term but pensions usually grow more than savings over the long term. You may be able to get your money moved into lower-risk investments as you approach retirement age. The provider of the pension will usually take a small percentage of the pot as their management fee.

Defined Benefit Pension Schemes

These are also known as ‘final salary’ or ‘salary-related’ pensions. They promise to give you a certain amount each year when you retire. How much you get doesn’t depend on investments, but rather on your salary and how long you have worked for the company. The workplace pension scheme does not apply to self-employed people or sole directors. If you are not directly employed by a company, you could use the National Employment Saving Trust or set up a personal or stakeholder pension.

For more information about the scheme, you can contact the DWP Workplace Pension Information Line on 0845 600 1268.






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