Your workplace pension
What’s a workplace pension?
Buried in the wodge of paperwork you receive when you start a new job will be something about a workplace pension. It is worth giving this a little attention – it can be an extremely valuable benefit. With a workplace pension, you will put in a bit, your employer puts in a bit and the government puts in a bit.
The minimum employee contribution for a workplace pension is 5%. Your employer has to put in at least another 3% (and some generous employers will put in more). Then, you’ll get tax relief on your contributions, depending on your income tax rate. The maths can be fiendishly complicated (though you won’t have to do it), but what you need to know is that for a pretty small outlay on your part, you get a fairly decent chunk into your retirement pot every month.
You will be automatically enrolled in your workplace pension scheme (as long as you’re earning over £10,000). You can opt out, but you’re missing out on a super easy way to save for your retirement. Also, it’s an easy way to start your pension savings early – and nothing is more important for your overall retirement income.
Why do you need one?
The state pension is all well and good, but it suffers from two major problems: it isn’t very much – around £180 a week at current levels - and the government keeps tinkering with it. A few years ago, women could expect to retire at 60, today it’s 66 and for future generations it extends to 68. The State pension is expensive and tends to be a convenient piggy bank when the government needs to sort out its finances.
You need some extra provision to enjoy a comfortable retirement and a workplace pension really is the easiest way to do that. Your employer is, in reality, offering your free money and it would be a shame to leave that on the table.
What do you need to do?
Your employer should make it easy for you. You will get all the paperwork when you start a new job, which will sort out the contributions. There is a second consideration, however – where do you invest? Usually, your employer will offer a number of options and a default option for those that can’t decide.
The options will usually be based around your appetite for risk. If you’re in your twenties and thirties, don’t be too cautious in your choices – your time horizon is 30+ years and you can afford to ride out the highs and lows of stock market investment. Also, you need your pension investments to keep pace with inflation and shares are the best way to do that.
Are there any pitfalls?
The biggest problem is that contributions into a workplace pension scheme reduce your take-home pay. However, taking a small hit today can be very important in your later years.
How much will it cost?
The cost to you will depend on your salary. Workplace pensions work on a percentage basis, so will increase automatically when you get a payrise. Some employees will allow you to sacrifice some of your salary to put it in your pension. This can be very tax efficient. In general, workplace schemes benefit from economies of scale, so the annual cost should be relatively low.
Useful links
Pensionbee - what is a workplace pension
