Essential Guide to Workplace Pensions: How They Work and Why They Matter
The basics of workplace pensions
A workplace pension is a pension pot that is arranged for you by your employer. It's one of the three main types of pensions that people in the UK can have, along with the State Pension and personal pensions (most commonly the Self-Invested Personal Pension or SIPP).
Workplace pension ownership has grown to new heights over the last decade. In particular, the introduction of Auto-Enrolment (AE) in 2012 has driven a significant increase in workplace scheme participation, with the Office for National Statistics (ONS) reporting that private sector enrolment more than doubled between 2012 and 2021 from 32% to 79%.[1]
When asked about their pension arrangements, a recent Boring Money survey found that 51% of non-retired UK adults state they hold a pension with a current employer and 37% hold a pension arranged by a previous employer. Altogether this equates to workplace pension ownership of 66% amongst non-retired individuals.[2]
Thanks to AE, there is a legislative requirement for all employers to automatically enrol eligible employees into a workplace pension scheme. Eligible employees are defined as UK employees who:
✅ Are aged between 22 and the State Pension age (SPa)
✅ Earn above the AE Earnings Trigger (ET) of £10,000 per year
How do workplace pension contributions work?
AE stipulates that employers must pay in a minimum of 3% of the employee's pre-tax earnings into their pot. This is just a lower limit and many workplaces will offer more than this. Employees typically pay in 5% of their pre-tax earnings, although this can be lowered or increased at your discretion.
If you’re already paying into a workplace pension today, you should check if you’re maxing out your employer contributions. Especially if your employer is willing to match your contributions or pay more into your existing pot. This will typically involve having a conversation with your HR department or at the very least talking to your line manager about your company’s pension policy.
Let’s say you’re currently paying the minimum contribution rate, which came into force in April 2019. This means you pay 5% of your pre-tax earnings into your workplace pension scheme while your employer puts in 3%. Overall your total contributions will amount to 8% of your pre-tax income.
Workplace pension contributions explained
Employer minimum contribution | Employee contribution | Total contributions |
3% | 5% | 8% |
This example is for illustrative purposes only. The exact terms of your workplace pension scheme may differ.
This is, remember, just the legal minimum in the UK and many pension schemes will allow either you, your employer, or both of you to contribute more. Some employers will match your contributions up to a certain amount - for example, 10%.
The first and most important thing to do if you’re thinking of paying more into a pension is to check if you’re making the most of your workplace scheme. It will typically be more straightforward to simply up your contributions into your existing plan than to go about setting up a SIPP, for example.
What is a defined benefit pension?
Some employees have a different type of pension called a "defined benefit" (DB) - or "final salary" - scheme.
Many of those who work in the civil service or healthcare (e.g. the NHS) have this type of plan, which typically guarantees you a predetermined income for life. It’s often dependent on how many years you’ve been an employee and your salary at the point of retirement.
DB pensions continue to diminish in popularity for new generations - just 21% of 45-54 year olds say that their main pension is a DB pension, in comparison to 42% of those retired and between the ages of 55-70.[3]
Top questions on workplace pensions
How much should I be paying into my pension?
There are a number of different suggestions of the ideal amount to be putting towards your retirement every year. Here are some popular examples you may hear from finance experts:
This retirement-saving method is fairly self-explanatory. Take your age and then half it. This is the amount of your pre-tax income you should be putting into your pension pot (this includes workplace pensions as well as any personal pension savings). So if you're 50 years old, you should be putting away a total of 25% of your pre-tax income towards your retirement.
Alternatively, a different approach is to put aside 15% of your pre-tax income (again, including both workplace and any personal pensions) into your retirement savings every year. So if your pre-tax income is £60,000, you should aim to put away a total of £9,000 towards your retirement each year.
Finally, another retirement saving rule of thumb is to save up 10 times your average salary by the time you reach State Pension age (currently 67). To stay on track, this is further broken down into the following milestones:
1x your salary by 30
3x your salary by 40
6x your salary by 50
8x your salary by 60
10x your salary by 67
So if you're currently 50 years old and your salary is £42,000, you should ideally have around £252,000 saved up for retirement purposes.
The reality is that everyone's approach to saving for retirement will be different and life gets in the way sometimes. You may be willing to be frugal for a few years to increase your contributions, while at other times, large or unexpected expenses may crop up and force you to streamline your saving strategy.
In any case, if you're in the position to contribute more to your workplace pension, it's a good idea to do so. Remember as well as the employer contributions and government tax relief, you'll also benefit from the snowball effect as your pot grows over time.
Consider maximising your own contributions and having a discussion about how much your employer would be willing to put in.
What is my pension actually invested in?
Your pension contributions are usually invested in a default scheme chosen by your employer’s pension provider. This arrangement will typically have underlying funds within it.
These funds are usually diversified - meaning your money is spread across shares, bonds, and other assets to spread risk. Most default schemes use something called a "lifestyling" strategy, whereby they invest more heavily in shares when you’re younger (to maximise growth) and gradually reduce this exposure as you approach retirement.
Although you'll typically be automatically assigned to a scheme when you're enrolled, some employers allow you to switch to other ones (or even other providers) if you want more control. For example, if you want to invest in a scheme with a higher risk profile or opt for a version which has better sustainability credentials.
The process of switching your scheme, and especially your provider, can be time-consuming. You'll need to start by contacting your current employer to ask whether it's feasible, as well as whether you need to liaise with your provider directly or if they can do it for you.
What happens to my pension if I change jobs?
Your pension doesn’t just vanish when you switch employers. That money is still yours, and it stays invested in the scheme your previous employer set up for you.
Each time you start a new job, your new employer sets up a new pension pot for you (usually with a different provider). Over time, you can end up with multiple pension pots scattered across different schemes, especially if you’ve job-hopped a bit - which, let’s face it, is the norm these days!
You’ve got a few options:
🧊 Leave it where it is
You can just let the old pot sit there. It’ll remain invested and (hopefully) continue to grow. The main downside is it can be easy to lose track of multiple pots over time, especially if you move jobs a lot, so try to make an effort to bank all your relevant paperwork somewhere so you don't forget what you're sitting on.
🔁 Transfer it into your new scheme
Some workplace pension providers allow you to transfer old pots into your new employer’s scheme, giving you one less account to worry about. This can help keep your retirement savings tidy and easier to manage.
📦 Combine multiple old pots into one
You could also consolidate your old pensions into a single personal pension through a pension consolidation service. These often offer more control over your investments, clearer fee structures, and modern dashboards that don’t look like they were built in 2003!
Can I take money out of my pension early?
Generally, you can't take money out of any pension products early unless you’re seriously ill or terminally diagnosed. For everyone else, the money is locked up until you’re 55 - rising to 57 from 2028.
How is my workplace pension taxed?
Your workplace pension is treated like the rest of your retirement saving products for tax purposes. When you start dipping into these, HMRC will be able to start taking its cut - but it's not all bad news.
The first 25% of your retirement pot is completely tax-free. You can take this as one big lump sum, or in smaller chunks over time, depending on your financial needs and goals. It can be a real treat to finally have access to this cash, but it's important to plan ahead and reduce the urge to go spending straight away - after all, you need to make sure your pot will last you throughout your whole retirement!
The remaining 75%? That’s where tax kicks in and it’s treated just like normal income. So if your withdrawals (plus any other income, like the State Pension or part-time work) push you into a higher tax bracket, you’ll pay Income Tax at the following rates:
20% for basic rate taxpayers
40% for higher rate taxpayers
45% for additional rate taxpayers
Planning your pension withdrawals smartly can help you minimise tax and maximise your retirement income. This is especially relevant if you’re balancing multiple income sources or you expect money to be a bit tight. A professional adviser will be able to help with your retirement planning and work with you to determine the most appropriate route.
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[1] Office for National Statistics, April 2022
