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Workplace Pensions

Workplace pensions are relatively simple; a percentage of your pay is put into the pension scheme automatically every payday along with your employer and government contributions.

The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.

How they work

The money is used to pay you an income for the rest of your life when you reach retirement age and no longer work. In many cases it’s possible to withdraw some of your workplace pension as a tax-free lump sum when you retire – if the amount you’ve saved is small enough, you may be able to withdraw it all. 55 is the earliest you’re able to take your pension- unless you’re seriously ill.

Types of workplace pensions

There are 2 main types of workplace pension, defined contribution and defined benefits – your employer decides which type of scheme you are offered.

Defined contribution pension schemes are also known as ‘money purchase’ schemes.

The money is invested by a pension provider chosen by your employer and the amount you receive when you retire will depend on how much has been paid in, how long you’ve been paying in and how well the investment has done.

The pension provider usually takes a small percentage of your pension pot as a management fee. Check the documents your employer gives you, or ask them, if you want to know how much this will be.

Defined benefit pension schemes are also known as ‘final salary’ or ‘salary-related’ pensions. These promise to give you a certain amount each year when you retire and the amount you receive doesn’t depend on investments – instead it depends on your salary and on how long you’ve worked for your employer.

Who pays what?

The amount you and your employer pay in varies according to what type of workplace pension scheme you’re in.  If you’ve been automatically enrolled in a workplace pension, a minimum percentage of your ‘qualifying earnings’ must be paid into your workplace pension scheme.

‘Qualifying earnings’ can be either the amount you earn before tax between £5,772 and £41,865 a year or your entire salary or wages before tax – your employer chooses how to work out your qualifying earnings.

If your employer offers you a defined contribution scheme, the minimum amounts can go up in October 2017 and October 2018.

Protecting your pension

There are a number of controls currently in place to minimise the risks to pensions and how your pension is protected depends on the type of scheme.

Defined contribution pension schemes are usually run by pension providers, not employers so you won’t lose your pension pot if your employer loses their business.

If for some reason your pension provider can’t pay, you can get compensation from the Financial Services Compensation Scheme (FSCS) providing they have been authorised by the Financial Conduct Authority.

Some defined contribution schemes are run by a trust appointed by the employer- these are called ‘trust-based schemes’. You’ll still get your pension if your employer goes out of business, but you might not get as much because the scheme’s running costs will be paid by members’ pension pots instead of the employer.

Defined benefit pension schemes – your employer is responsible for making sure there’s enough money in the pension fund to pay each member the promised amount and they cannot touch that money if they’re in financial trouble.

You’re usually protected by the Pension Protection Fund if they go bust and can’t pay your pension.

If there’s a shortfall in your company’s pension fund because of fraud or theft, the Pension Protection Fund may be able to recover some of the money.

Getting help and advice

You might want to get advice before joining a workplace pension in some specific circumstances – for example, if you’re already paying into a personal pension you may wish to check whether it’s better for you to continue  with this and this alone, stop paying into your personal pension and join your workplace pension or keep paying into both.

At DPT, our advisors can give you the support and information you require with every aspect of your workplace pension.

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