Workplace Pension Schemes

YAY - I hear you cry...more pension content...I do try!

Today, we'll go through workplace pensions. 

I have already reiterated in Blog #8 and Blog #13 just how terrible the state pension is but how wonderful the tax wrapper on private and workplace pensions are. 

One more time though; the state pension is only just over £159 a week; you only receive this if you have worked all your life and paid national insurance tax. Coupled with this, you only get the state pension when you get to 68.

Private pensions we covered in blog #8....SO

....workplace pensions. 

 

The Mechanics

If your employer has a workplace pension, you can opt to make regular contributions. 

These contributions are taken out of your pre tax wages, and are also known as "salary sacrifice". The contributions are set aside into a pension scheme which you can access, like the private pension scheme, at 55. 

Private pensions are a tax benefit as the pension comes out your salary before tax, and thus reduces the amount you are taxed upon, and therefore pay in tax. 

 

Worked Example:

Lets pretend my salary is £33k a year; this is £2,750 per month before tax is removed. I decide to opt into my company pension scheme, and contribute £200 per month.

  • No pension contributions:
    • on £2,750, I pay £606.69 in income tax and national insurance.
    • I therefore receive £2,143.31 into my bank account every month
  •  Pension contributions
    • If I contribute £200 to a workplace pension, I will have a pre tax amount of £2,550 (£2,750 less £200)
    • I will pay £542.69 in income tax and national insurance
    • I therefore receive £2,007.31 per month; this is £126.93 less per month in my bank account, but £64 less per month in tax and a pension pot for my future. 

 

Employer Contribution Scheme

These are normally BRILLIANT and you should use them. It's effectively a pay rise and free money from your company. 

Many of the employer contribution schemes are "matching" schemes capped at a specific amount. 

 

What does this mean?

You work somewhere, and your employer offers to match you to 5% in their pension contribution scheme.

This means that if you put 1%, all the way up to 5% of your salary into your workplace pension, your employer will add the same amount in company money, into your account. 

For example, you earn £33k a year and your employer has a matching pension scheme capped at 5%. You decided to put 3% of your monthly salary into your pension; this is £82.50 a month. Your employer will match you, adding another £82.50 of company money to your pension scheme. On a monthly basis, this is £165, which, over 5 years is £9,900; £4,950 is the company's money (hence a pay rise).

 

Auto-Enrolment

All companies above a particular size have to enrol you into a company pension scheme.

The government realised that they didn't have enough money and resource to cope with the ageing population; this population puts strain on the country's social and welfare benefits. The government asked workplaces to enrol their employees in a workplace pension scheme; employees have to make a contribution, but so does the employer.  

This only applies to companies without a pension scheme in place already. You are automatically enrolled (auto-enrolled) into the scheme, and have to "opt out" if you do not want to be part of the pension scheme. 

The amount you have to contribute varies dependent on your salary; most companies opt for "qualifying earnings" where 1% of your earnings, greater than £5,876, but less than £45k per year is contributed to the pension. At a minimum your employer has to match you at 1%.

Using the example above, if I earn £33k, I have to 1% of 27,124 (£33,000 less £3,876). 1% of this amount is £271.24 per year, or £22.60 per month. This is a tiny sacrifice for future you. 

Both employee and employer contribution percentages will rise over the next couple of yours. 

 

Is it right for me?

Company pensions are effectively free cash; you are contributing to your future, and your employer is providing his / her own money into this contribution. 

Your salary will decrease slightly; the small short term suffering in many cases is worth the long term benefit of having a pension scheme you can access at 55. 

 

Photo from the beautiful unsplash.com

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