What is a workplace pension & how does it actually work?

What is a workplace (occupational) pension scheme?

A workplace pension is a pension provided through your employer. It may be a defined contribution scheme or a defined benefit scheme.

'Occupational pension scheme' is just another name for a workplace pension scheme. The terms can be used interchangeably.

Does an employer have to provide a workplace pension?

If you are eligible for a workplace pension, your employer must enrol you into one by law and make contributions into it.

You also pay in contributions (usually deducted automatically from your salary), helping you build up a fund for your retirement.

All these contributions receive a further boost from pension tax relief.

You should therefore consider paying in as much as you can reasonably afford, as it will mean much more money for you in the long term.

Who is eligible for a workplace pension?

You are eligible for the workplace pension if you are:

• Aged 22 or over
• Below state pension age
• Not already in a qualifying pension scheme
• Earning more than £10,000
• Ordinarily employed in the UK

What are the advantages of an occupational pension scheme?

An occupational or workplace pension scheme has several advantages over a personal pension.

1. Convenience

You’ll be automatically enrolled in your workplace pension unless you choose to opt out, so you don’t have to go to the bother of setting up a personal pension.

2. More contributions

The biggest advantage of a workplace pension is employer contributions. This can greatly increase the amount you can pay into your pension, sometimes more than doubling it.

This boost can lead to much faster growth of the overall pot, and ultimately more pension money for you.

3. You may be able to use salary sacrifice

Some employers offer a scheme called salary sacrifice to allow you to make pension contributions in a more tax-efficient way.

There can be some drawbacks to this, but many people choose to save money this way while boosting their pension.

4. It is managed for you

With a personal pension you’ll have to take more responsibility for checking how it’s performing – especially if it is a SIPP which you manage yourself.

By contrast, a workplace pension is generally taken care of by your provider – though it’s still a good idea to check in on it from time to time.

5. It may be defined benefit

If you are very lucky, your employer may offer a type of pension known as ‘defined benefit’ (or final salary).

This pays you a guaranteed income for life from a set date, and is generally considered to be much better value for money than standard pension schemes (known as ‘defined contribution’).

Some types of defined benefit scheme can later be transferred into pension pots – but it’s necessary to take advice on doing so, as it’s often not the best decision.

Can you opt out of a workplace pension?

It’s possible to opt out of a workplace pension scheme, but generally not a good idea (except in rare circumstances).

It is illegal for an employer to ask you to opt out of the workplace pension scheme, or to put any pressure on you to do so.

If you are concerned about joining it (for instance, if your pension savings are already close to the lifetime allowance), then talk to a financial adviser.

You may think that by not joining the workplace pension, you will have more take-home pay.

However, you would be missing out on employer contributions as well as tax relief, so you would be turning down a large amount of 'free money' besides depriving yourself of income in later life.

What type of pension do I have?

Most people have a defined contribution (DC) pension, where you and your employer pay a portion of your wage into your pension each month to build up a pot of money.

Defined benefit (DB) schemes are different, and provide a guaranteed income for life from your set retirement age.

This income is calculated based on how much you earn and how long you’ve been a member. When you retire, you will be paid a set amount for the rest of your life.

The type of pension you have will usually be clear from the information provided by your pension scheme. If you’re unsure, ask your employer or the scheme itself.

How much do I have to pay into my workplace pension?

If you’re enrolled in a workplace pension, you must pay in at least 5% of your pre-tax earnings. 

This percentage is usually calculated from your total wage, including bonuses and commissions, overtime, statutory sick pay and maternity, paternity and adoption pay.

You can of course pay more than this if you wish, so long as the scheme and your pension allowances permit.

How much does my employer pay into my pension?

Your employer must pay a minimum of 3% of your wage into your pension. This is based on "qualifying earnings," which is currently between £6,240 and £50,270 (as of the 2024/25 tax year).

Can I have an occupational pension and a personal pension?

There is no limit on the number of pensions you can have at one time, so you’re free to have an occupational and personal pension(s).

The only restriction is you can only pay in up to £60,000 or 100% of your salary (whichever amount is lower) per tax year.

What else do I need to do about my workplace pension?

Many people don’t realise that they could get a lot more value from their workplace pension.

Something as simple as changing how your money is invested could give your retirement savings a significant boost, perhaps by tens of thousands of pounds.

Step 1: Find out how your pension is invested

Assuming you have a DC pension (a ‘pension pot’), it will be invested by the scheme in a selection of assets, known as a fund.

You hope that this fund will perform well over time so that your pension pot grows larger. However, your choice of pension fund can make a big difference.

Unless you request otherwise, your pension will be placed into the scheme’s ‘default fund’.

A default fund is broadly designed to meet the needs of all employees, i.e. both young and old, junior and senior.

This means it may suit everyone to some extent – but is unlikely to suit anyone perfectly.

Fortunately, most pension schemes also offer a range of other funds to choose from, some of which may be more suitable for you.

For example, some funds may over lower-growth, safer investments for those nearer retirement, or high-growth, high-risk assets for people early on in their career.

Certain funds may also have higher fees attached. It’s possible to switch between funds as your career progresses, so that your pension continues to suit your circumstances.

Your choice of pension fund can make a difference of tens of thousands of pounds to your final pension pot, so this isn’t a trivial decision.

A financial adviser can help you decide which fund is best for you at any given time.

Step 2: Find the best pension fund

Follow these tips to see if your workplace pension could be working harder for you.

1. Ask your pension scheme for details of their various funds
2. Find a financial adviser and ask them to help you compare the funds available, based on your circumstances and goals.
3. Decide whether or not you are currently in the most suitable pension fund and if not, switch.
4. Continue to carry out regular pension checks every few years to ensure that your fund still meets your needs. Bear in mind that funds may show short-term fluctuations, so don’t make snap decisions – what matters is the long-term growth.

If you found this article useful, you might also find our article on what to do if your employer hasn't paid your pension contributions informative, too.

FAQs

Is Nest an occupational pension scheme?

Nest is an occupational or workplace pension scheme that was set up by the government and can be offered by any employer as the company’s occupational pension scheme.

Is the NHS pension an occupational pension?

Yes. The NHS pension scheme is the occupational pension offered to anyone working for the National Health Service.

Do I pay National Insurance on my occupational pension?

You don’t pay national insurance (NI) contributions on any income you receive from your occupational pension, including annuities and final salaries, but you may still have to pay income tax if you receive more than £12,570 per tax year.

What if my occupational pension scheme was contracted out?

Before 2016, you or your employer could ‘contract out’ your workplace pension or chose to pay a lower amount of pension-qualifying NI contributions in favour of paying into a private pension scheme.

The amount of additional state pension you receive will depend on your SERPS (State Earnings Related Pension Scheme) contributions.

You may have been contracted out without even knowing. A qualified financial adviser can help you track down any protected rights pensions you’re not aware of.

Is a state pension reduced by having an occupational pension?

Your occupational pension is entirely separate from and does not affect your state pension, which is based on how many qualifying years of NI contributions you have.

Does an occupational pension affect carer’s allowance or ESA?

Neither occupational nor personal pensions count as earnings, so they will not affect your entitlement to carer’s allowance.

However, if you’re claiming ESA, both means tested and contributory, any pension income above £85 per week will reduce the amount you receive.

Get expert financial advice

Opting for a workplace pension could help you significantly increase your pension savings pot over time. If you are eligible, you and your employer will make regular contributions to your workplace pension, which will be further enhanced by pension tax relief to maximise your savings.

Unbiased can match you with an experienced financial adviser who can walk you through your pension options and help you determine whether a workplace pension is the right choice for your financial future.