Many of us look forward to retirement at the end of our working lives, and many people dream of travelling, relaxing and enjoying our new found leisure time. However, it’s important to consider the importance of saving for retirement during your working life.
Many of those activities do not come cheap, and if you suffer from ill health later in life, then your money can quickly run out. The current state pension is only £141.85 per week, meaning it’s important to save a portion of your wages for retirement, so you don’t have to worry about money when you’ve stopped working.
Legally, you are auto enrolled onto your workplace’s pension scheme – although you can choose to opt out. This is a popular scheme among workers because it allows employees to save for their pension without even thinking about it.
What is a workplace pension?
A workplace pension is an easy and convenient way to save for retirement. Both you and your employer pay into the pension scheme every month, under auto enrolment rules.
Your pension payment is taken directly out of your payslip every month. Your employer and the state top up this payment. The government tops up your pension contribution in the form of tax relief.
There are a few different types of pension – such as the State Pension, which is paid to everyone by the government and a private or personal pension which is unconnected to your workplace and is instead set up by you rather than your employer.
How does a workplace pension work?
Typically, most workplaces’ pension schemes are defined contribution pensions, which means that the amount you’ve saved for your pension when it comes to retirement depends on how much you paid into your workplace pension.
Whenever you join a new pension scheme – be that whether you change employer or your employer sets up a new workplace pension scheme – you will be informed about the scheme and you will be able to agree how much you pay in per month.
Your pension scheme payment will be taken out of your wages before you get paid, and your employer and the government will also contribute to your pension.
How do Employee and Employer Contributions work?
For every employee’s pension, the contributions will come from the employee themselves, the employer and the government. The government will contribute to your pension in the form of tax relief.
Employees will typically contribute 5% of their payslip, while employers contribute at least 3%. These percentages are the minimum payments associated with the auto enrolment workplace pension system.
Once you are paying into your pension, the government contributes to it via a tax relief scheme. This means that if you are signed up to a pension scheme, some of your taxes will get paid into your pension scheme by the government. The tax relief is worked out based on the rate of income tax that you pay.
What is automatic enrolment?
Since 2012, employers have had to automatically enrol their employees into workplace pension schemes. All employers must put their employees into a qualifying pension scheme and contribute towards each employee’s pension.
Automatic enrolment is a legal requirement, and it has made it much easier for people to save for retirement. Before its rollout, workers usually had to ask employers if they could join a pension scheme. This meant that lots of employees were missing out on saving enough money for retirement.
If eligible employees do not want to pay into the workplace pension scheme, then they can opt out.
Are there different types of pension schemes?
There are two different types of pension schemes – defined contribution schemes and defined benefit schemes.
Defined contribution schemes
Defined contribution schemes are the most common way for employers to meet the workplace pension requirements.
Pension contributions are paid into a worker’s pot, which will be invested by the pension provider. The final amount that the worker has at retirement will depend on how much has been invested and how well the investments have performed.
Defined benefit schemes
Defined benefit schemes will promise workers an annual pension sum after retirement. The amount that workers get paid in retirement depends on their earnings and how long they have been members of this scheme.
Typically, defined benefit schemes are less common today than they were, and are only typically associated with the public sector or older workplace schemes. These schemes are typically referred to as a “final salary” or “career average”.
Who is eligible for a workplace pension scheme?
Most workers are eligible for a workplace pension scheme. Employees must be:
- Between the ages of 22 and state retirement age
- Earning a salary of more than £10,000 per annum
- Work in the UK with an employment contract
Unlike the state pension, a workplace pension scheme will guarantee that you can save money for your retirement for every year that you work. Saving up for retirement is essential if you want to enjoy retirement without worrying about finances and your pension savings will help provide you with care once you’re retired, if need be.
It’s important to start saving for retirement as soon as you’re eligible, since the earlier you start to save, the more money you will have in your pension.
Employees will be auto enrolled into their employers’ pension scheme, so there’s no risk of missing out of your pension. Employees, employers and the government will make contributions to the pension scheme, so by the time employees retire, there’s enough money to last them through their retirement.
How can Payroll Solutions help?
At Payroll Solutions, we have created great payroll software and workplace pension solutions for big and small companies. Our systems will ensure that your employees are properly enrolled into the company’s pension scheme and that the payments made by the employer and the employee are the right amount.
For further information and guidance on workplace pensions and how we can help, contact us today.