Workplace pensions explained

A workplace pension is a way of saving for your retirement that is arranged by your employer¹. A percentage of your pay goes into the scheme automatically every payday, and in most cases your employer adds money too¹. The government also pays in, in the form of tax relief². So for every pound you put in, two other parties are usually adding money alongside it.

Most workers are enrolled without having to ask. If you are over 22, under State Pension age and earn more than £10,000 a year, your employer must put you into a scheme and pay in at least 3% of your qualifying earnings³. The legal minimum total contribution is 8% of qualifying earnings, of which you pay 5% and your employer pays at least 3%⁵. You can opt out, but you give up the employer's money and the tax relief, and your employer must re-enrol you roughly every three years⁷.

How a workplace pension is set up and run

A workplace pension is arranged through your employer as a way to save for your retirement¹². You may also see it called an "occupational", "works", "company" or "work-based" pension; these all mean the same thing¹³. All employers must organise pensions for their employees to help them save for retirement¹³, and the scheme itself is run by administrators or trustees rather than by your employer directly¹⁴.

The money is taken from your pay automatically each payday¹. Your employer chooses the pension provider that invests the contributions in a defined contribution scheme¹⁵, and they must write to you when they enrol you, telling you the date you joined, the type of scheme and who runs it, how much they will contribute, how much you will pay, and how to leave⁷. Some employers offer personal pensions as workplace pensions instead, which work in a similar way from your point of view¹⁶.

Your payslip is where you see the deduction. Employers must provide a payslip on or before payday, printed or electronic, to employees and workers, though not to contractors, freelancers, merchant seamen, share fishing crew or the police service¹⁷. Deductions that are fixed in amount, such as a season ticket loan repayment, can be shown on the payslip or in a separate statement sent before the first payslip and updated every year¹⁷. Pension deductions vary with your pay, so they appear as a line on the slip itself, often labelled with the scheme or provider name. If a deduction appears that you do not recognise, ask your payroll team what it is before assuming it is your pension.

Who is automatically enrolled: age 22 and earning £10,000 or more

Automatic enrolment is the rule that puts you into a scheme without you having to do anything. The eligibility criteria are that you are aged between 22 and State Pension age, earn at least £10,000 a year, and work in the UK under a contract of employment or a work arrangement⁴. The House of Commons Library describes the same test: you are not already in a scheme, you are between 22 and State Pension age, and you earn more than the minimum earnings threshold¹⁸. In weekly and monthly terms, £10,000 a year is £192 a week or £833 a month³.

Workers outside that core group have rights too, but not automatic enrolment:

The £6,240 line is sharp: earn even one penny more than that and, if you are in a workplace pension, your employer has to contribute³. Employers also have duties towards people earning £120 a week or less, or £520 a month or less, who can still ask to join a scheme⁷.

Your employer cannot encourage or force you to opt out, cannot unfairly dismiss or discriminate against you for staying in, cannot imply someone is more likely to get a job if they opt out, and cannot close a scheme without automatically enrolling members into another one⁷. If an employer is unwilling to pay your contributions into the scheme, that is something you can report to The Pensions Regulator²⁰. The full detail is on the automatic enrolment page.

Minimum contributions: 8% of qualifying earnings

The legal minimum total contribution to a workplace pension is 8% of your qualifying earnings⁵. Of that, your employer must pay at least 3%⁵, leaving 5% from you in the standard example, part of which comes from tax relief rather than from your take-home pay²³. Qualifying earnings means the band of pay between £6,240 and £50,270⁵. A parliamentary committee notes that minimum auto-enrolment contribution levels currently amount to 8% of earnings²⁴.

Because contributions are worked out on qualifying earnings rather than your whole salary, the amount that actually leaves your payslip can look smaller than you expect. The 8% minimum applies to that band of earnings, not to your full pay, and it is typically split 5% from you and 3% from your employer. Employers must pay contributions to the scheme on time, usually by the 22nd of each month⁷.

Paying only the minimum is a choice with consequences. One illustration followed a saver from age 22 paying the minimum 5% while the employer paid 3%, and compared it with higher contributions: at 6% the pot at 68 was estimated at £236,000, and at 8% (roughly £167 a month) it was estimated at £289,000, an extra £79,000 compared with the minimum²³. These are illustrations, not promises, and depend on how investments perform. Many schemes let you pay more than the minimum, and some employers will match extra contributions up to a limit, so it is worth asking your payroll or HR team what your employer's matching rules are. The auto-enrolment contribution rates page has the detail.

Tax relief is how the government adds to your pot

Tax relief is the government's contribution to your pension. For basic rate taxpayers, for every £80 you contribute you receive an additional £20 into your pot from the government²⁵. For a higher rate taxpayer paying 40%, a £60 contribution boosts the pot by £100, because of the relief claimed back²⁶. Higher rate taxpayers qualify for relief at 40%, and additional rate taxpayers at 45%⁵.

The extra relief above the basic rate does not arrive by itself. If you pay Income Tax at a rate higher than 20%, you need to claim the extra relief yourself, via HMRC or a Self Assessment tax return²⁷. In England, Wales and Northern Ireland, higher rate taxpayers earning over £50,270 get an extra 20%, and additional rate taxpayers earning over £125,140 get an additional 25% on top of the basic rate relief²⁹. Scottish income tax bands differ, and the tax relief for Scottish taxpayers page explains how that works.

There are limits on how much relief you can get. Each year you receive tax relief on pension contributions of up to 100% of your UK earnings, salary and other earned income¹², and you can contribute as much as you like into any number of schemes, though tax relief is capped by the annual allowance, up to £40,000 a year depending on your earnings and pot value³⁰. The pension tax relief page covers the mechanics, including the difference between relief at source and net pay, which determines whether relief is automatic or claimed.

Defined contribution or defined benefit: how each one works

There are two types of workplace pension scheme: defined benefit and defined contribution³¹. Most people joining a workplace pension today are in a defined contribution scheme.

A defined contribution scheme builds a pot based on what you and your employer paid in, plus investment growth. Your employer chooses a pension provider to invest the contributions¹⁵, and the pot is put into various types of investment, such as shares³¹. The value of your pot at retirement depends on how much you and your employer contributed and how well the underlying investments performed²¹. Nothing about the final amount is guaranteed.

A defined benefit scheme, sometimes known as a final salary or career average scheme, promises to give you a certain amount each year when you retire¹⁵. It is based on your salary and how long you have worked for your employer³². The pension is usually worked out as a fraction of your salary multiplied by the number of years you were a member³³. Your employer makes contributions and is responsible for making sure there is enough money at retirement to pay a secure income for life³², and cannot spend the pension fund even if they have financial problems¹⁵.

The comparison page on defined benefit vs defined contribution goes further, and defined benefit pensions and defined contribution pensions each have their own guide.

Charges on workplace pensions: capped at 0.75%

Charges matter because they are taken from your pot year after year, and they compound in the same way growth does. For the default arrangements of qualifying defined contribution workplace schemes, the annual charge cap is set at 0.75% of funds under management, or an equivalent combination charge⁸. In practice, schemes charge on average around 0.3% on pension pots, according to a government consultation³⁴.

The cap applies to the default fund, which is where your money goes unless you choose otherwise. If you pick your own funds within the scheme, those funds may cost more than the cap allows, so check the charge before switching out of the default. The workplace charges and charge cap page explains what the cap covers and what falls outside it, and default funds explains where your money goes if you do not make a choice.

Opting out and what you give up

You can choose to opt out of a workplace pension². Your employer must tell you the start and end dates of the one-month opt-out period when you are enrolled¹⁹, and if you opt out within one month they must refund the money you have paid⁷. Opting out is usually done by filling in a form and returning it to your employer or pension provider⁶.

What you give up is substantial: your employer's contribution, worth at least 3% of qualifying earnings⁵, and the government's tax relief²⁵. Those are payments you cannot recover later, because the years of contributions you skip cannot be backfilled except within the annual allowance rules. You also give up the investment growth those contributions would have earned between now and retirement.

Two cautions apply. First, if you have enhanced protection or fixed protection (large pots protected from past lifetime allowance charges) and you are automatically enrolled, you may lose that protection unless you opt out¹⁹. Second, some older workers were contracted out of the Additional State Pension under the State Pension rules before 2016, meaning their workplace or private scheme built in a replacement for part of the State Pension³⁵; the contracting out and Guaranteed Minimum Pension page explains what that means. Separately, if you are offered a Pension Wise appointment through a trust-based scheme, you cannot opt out of it at the moment it is offered; you have to contact the scheme proactively to do so³⁶.

Your employer must let you rejoin the scheme at least once a year if you have opted out, and must enrol you back in at least every three years if you are still eligible⁷. The opting out and refunds page has the process step by step.

Leave, sickness and changing jobs

Contributions continue in some situations and pause in others. If you are getting paid during maternity leave, you and your employer continue making contributions, with your contribution based on your actual pay at the time and your employer's based on the salary you would have received if you were not on leave³⁷. If you are not getting paid during maternity leave, your employer does not have to contribute unless your contract provides for it³⁷. On unpaid leave generally, you may be able to keep making contributions if you want to³⁷.

Sickness works differently, because of a rule on assumed pensionable pay. Where a member is on leave due to sickness or injury on reduced contractual pay or no pay, on child-related leave, or absent on reserve forces service leave, assumed pensionable pay applies³⁸. In practice this means the pension can continue to build as if you were on normal pay, though how it works depends on your scheme's rules. If you retire early through ill health, there may be special terms in the scheme rules that allow the pension to be enhanced³³, and the ill health early retirement page covers that.

When you change jobs, your pension belongs to you². It does not disappear and your former employer cannot take it back. Your options are to leave it where it is, transfer it, or combine it with other pots, which the leaving a job and combining pots pages cover. Some benefits are only available to an employer's current workers³⁷, so a scheme you have left may not accept further contributions. If you reduce your working hours, that could affect how much you get, so check with your employer³⁹. Most businesses do not set an age at which employees must retire⁴⁰, and you can usually keep working and contributing past State Pension age.

When you can take your money: from 55, rising to 57

You cannot usually take money from your pension scheme until you are at least 55, unless you are seriously ill³⁷. You can currently take a private pension, including some workplace pensions, from age 55, and this increases to age 57 from April 2028⁹. The earliest you can take any of your pension money is usually age 55, or 57 from April 2028¹⁰.

When you reach that age, you can take the first 25% of your pension pot tax-free, and you will be charged income tax on any additional money you take¹¹. You can take out more if you choose, up to the remaining value of the pot, but that too is subject to income tax³⁰. If the amount saved is quite small, it may all be taken as a lump sum, with 25% tax-free and Income Tax on the rest¹⁹. The ways to take money page sets out the options, including drawdown, annuities and taking the whole pot.

You may also be able to draw all or some of your lump sum and pension while still working full or part-time for the same employer, depending on the scheme's rules¹². Bear in mind that taking money before State Pension age reduces what is left to live on later, and the how much do I need to retire page helps with working that out. Free guidance is available from Pension Wise.

Transferring a workplace pension and the risks involved

Transferring means moving your pot from one scheme to another, usually to a new employer's scheme or a personal pension. It can simplify things and may cut charges, but it is not free of risk. You may have to make payments to the new scheme, pay a fee to make the transfer, lose any right you had to take your pension at a certain age, lose any fixed or enhanced protection, or lose any right to take a tax-free lump sum of more than 25% of your pot⁴¹. Transferring pension savings overseas can have tax implications depending on your circumstances and the type of scheme you transfer to⁴¹.

The Financial Ombudsman sees complaints about transfers where an adviser did not check the customer's attitude to risk or capacity for loss, recommended unsuitable investments, or advised transferring workplace benefits with the loss of employer contributions or guaranteed final salary benefits⁴². Transferring out of a final salary scheme means giving up a guaranteed income for life, which is why the final salary transfers and transfer advice rule pages exist.

Scams are a real risk in this market. Despite concerns from industry that 5% of pension transfers could have features of a scam, safeguards have been the subject of ongoing policy work²⁰. The pension scams page lists the warning signs, and the transferring between providers page covers the mechanics, including what to do if a transfer is delayed.

Where to get help

If your employer is unwilling to pay your pension contributions into the scheme, or payments are missing, you can report it to The Pensions Regulator⁴³. Complaints about how a scheme is run can go to the scheme's trustees or administrators first, and then to the Pensions Ombudsman; the Pensions Ombudsman page explains the process.

For guidance rather than complaints, Pension Wise offers free help with your options from age 50⁹, and MoneyHelper covers pension basics including how personal pensions work²⁸. For advice about increasing your workplace or private pension, official guidance is to speak to a financial adviser¹.

If you are behind on your mortgage, rent, credit card or other debt payments, a pension might not be the right step now¹⁹. Money held in your pension usually cannot be claimed by anyone you owe money to, even if you are declared bankrupt or in a formal debt repayment plan¹⁰, and you cannot be forced to take money out of your pension to pay your debts³⁰. But pension money is locked away until at least 55, so it cannot solve a short-term debt problem. Free debt advice is available from charities, and the debt section explains the help that exists.