How Do Employer Pension Contributions Work?
A workplace pension is a scheme through which you save for your retirement – it is entirely separate from the state pension, which for the 2019-20 tax year sits at £168.60 a week.
As the name suggests, a workplace pension is arranged by your employer and any contributions you make are topped up by your employer and by the government, in the form of tax relief.
Since the introduction of Automatic Enrolment, which was phased in by the government gradually from 2012, it is now mandatory for all employers to enrol eligible employees into a workplace pension scheme. This means that more people have the opportunity to build up a pot of money for their retirement.
What Are the Criteria for Enrolment?
You will be eligible for automatic enrolment as long as you meet the following criteria, whether you work full or part time:
- You must work in the UK
- You should not already be in a suitable workplace pension scheme
- You must be at least 22 years old, but under State Pension age
- You must earn more than £10,000 a year for the tax year 2019-20
You will still be eligible if you’re on a short-term contract, work through an agency or you’re on maternity, adoption or carer’s leave.
How Much is Paid in?
The minimum contribution that must be paid into a workplace pension is set by law, and increased to a total of 8% of qualifying earnings in April 2019. This 8% should be made up of at least 3% from the employer, 4% from the employee and the remaining 1% via tax relief from the government.
Qualifying earnings for the 2019-20 tax year is defined as anything above the first £6136 an employee earns in a year, up to a maximum of £50,000.
Your employer may voluntarily pay on more than their minimum 3%, and you may choose to contribute more towards your pension pot, too. Keep in mind that you are likely to get a better return on your pension savings than on money in a bank-based savings account, so it’s worth paying in as much as you can afford. The more you pay in, the more ‘free money’ you will get from the government as tax relief on your pension savings.
Do I Have to Take Part?
You do have the right to opt out of your workplace pension scheme. However, doing so means you won’t benefit from your employer’s contributions, or on the tax relief from the government. Most people find that participating in a workplace pension is an extremely effective way to start building up a pot for retirement.