PENSIONS

Occupational Pensions / Auto Enrolment

Future-ready support with tax advantages

How occupational pension schemes work

An occupational pension, also called a workplace pension, is a way to save for retirement through your employer. Each payday, a part of your pay is automatically deducted and invested into the scheme. Your employer also pays into the scheme on your behalf. Additionally, the government contributes through tax relief.

For most schemes, this means that even if you only pay basic rate tax, your pension contributions increase. The scheme administrator claims the tax relief from the government and adds it directly to your pension pot.

Two types of scheme

There are two main types of occupational pension schemes:

Defined Contribution (DC) schemes: Your retirement income depends on the amount you and your employer have contributed, plus investment growth over time. Most modern workplace pensions are DC schemes.
Defined Benefit (DB) schemes: Your retirement income is based on a formula, typically linked to your salary (often your final or career average salary) and the number of years you have worked for the employer. These are now less common, especially in the private sector.

What happens if the employer goes out of business?

Your pension savings are generally protected if your employer becomes insolvent. The pension scheme’s assets are held separately from the company’s money and are not available to creditors.

In a Defined Contribution (DC) scheme, whether it is managed by an insurance company (contract-based) or run by trustees (trust-based), your pension pot is legally separate and protected.
In a Defined Benefit (DB) scheme, which is always trust-based, if the scheme has insufficient funds to pay the promised pensions, the Pension Protection Fund (PPF) may step in to provide compensation, although this may be at a reduced level.

Auto Enrolment

Under the ‘Automatic-enrolment’ rules, UK employers must automatically enrol eligible staff into a workplace pension scheme. An employer must assess their workforce and enrol any ‘eligible jobholders’ — typically employees who are aged between 22 and the State Pension age and earn over £10,000 a year. It is important to note that these earnings thresholds can change in the future.

Employees can choose to opt out of the scheme if they wish, but they will be automatically re-enrolled roughly every three years. Other workers who are not automatically enrolled might still have the right to opt in and receive an employer contribution.

Contribution costs

To fulfil auto-enrolment obligations, there are statutory minimum contribution levels. Currently, a total minimum of 8% of an employee’s ‘qualifying earnings’ must be paid, with the employer contributing at least 3%. The employee contributes the remaining 5%, which includes tax relief.

‘Qualifying earnings’ refer to a specific range of earnings set by the government each year. However, some employers may decide to calculate contributions based on your total pensionable pay, which can be more generous. Many employers also choose to contribute more than the legal minimum as part of their employee benefits package.

ADVICE ON AUTO ENROLMENT PENSIONS IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.