What is a company pension?

Company pensions

What is a company pension?

By Paul Davies

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What is a company pension?

Discover how company or workplace pensions operate, and the different types of pension you might have via your employer.

A workplace (or company) pension is one that's arranged for you by your employer. They work by you paying a percentage of your salary into the pension scheme every payday.

Should I take a workplace pension?

In most cases, the government and your employer contribute to your pension. This is the main reason for people joining company schemes – it's like receiving additional pay from your employer. Contributions aren't liable for income tax, which is another plus. To learn more about how tax affects you, visit the Which? tax calculator.

You can usually take some of your workplace pension as a lump sum when you retire. 25% of that will be tax-free.

Defined contribution pension schemes

Also known as money purchase or DC schemes, defined contribution schemes work by your employer selecting a pension provider who will invest the money you pay in. Many schemes operate what is known as a glidepath, moving your money into lower-risk investments as you near retirement so that you can maximise your income.

The amount you get at retirement will depend on:

  • the administration fees charged by the provider
  • how much has been paid in
  • how long you've been paying in for
  • how well the investment has performed.

Defined benefit pension schemes

Also known as final salary schemes, defined benefit pension schemes are being phased out in favour of defined contribution pensions. This is because they cost more to administer. They work by promising to pay out a certain amount when you retire, based on your salary – unlike DC schemes, which are based on your contributions. How the investments perform won't affect what you get.

People who work in the public sector – such as for the NHS, armed forces or police – tend to be enrolled in final salary schemes. This has led to criticism of public sector pension schemes as being more generous than private sector schemes and has been cause for reform.

Auto-enrolment

Since 2012, all employers have had to offer a pension scheme to staff. The reason for this is that, currently, not all employers provide workplace pension schemes, and many employees also don't bother to join their company's scheme. 

All workers who earn above £10,000 a year will be automatically enrolled into a pension. Companies without a scheme of their own can enrol workers into the National Employment Savings Trust (Nest).

Read more about auto-enrolment in our guide, Auto-enrolment and Nest.

What happens to my pension when I change jobs?

If you have left a job, you can transfer your pot to the scheme at your new workplace. However, this can be complicated. If you are transferring out of a defined benefit scheme into a defined contribution scheme, for example, you should consider the fact that you are giving up a promised payment at retirement.

Transferring defined contribution schemes is much easier – you can just take the funds with you. However, it's worth watching out for any exit fees imposed and the annual management charges on the new scheme, which could decrease your pot.

  • Last updated: May 2016
  • Updated by: Paul Davies