Company pensions explained Should I join my company pension scheme?

It's normally worth joining your employer's pension scheme

For most people, the answer to this will be ‘yes’. There are two main reasons why:
1. Pension contributions are a form of tax-incentivised saving.
2. If your employer makes a contribution to your pension, this is like receiving additional pay.

Pensions and tax

Pension contributions benefit from tax relief. This means that they're taken from your gross income, before any tax has been deducted.

With workplace pensions that are GPPS or stakeholder schemes, your contributions are treated as net - even if your employer collects them direct from pay and passes them to the provider - and the provider then claims the basic rate relief to add to the plan.

The effect of tax relief is that a contribution of £100 that would have been taxed at 20%, and therefore worth just £80 net, is paid into your pension fund without any HMRC deduction. 

For a 40% (or 50% from 2011-12) taxpayer, the impact is even greater. For DC pension scheme members, this is particularly significant as it boosts the size of contribution going into their pension ‘pot’ each year. 

This allows them to buy a bigger annuity when they retire and maximise their pension income. They don’t escape tax altogether, though, since pension income is taxable. Essentially you escape tax ‘on the way in’ but pay it ‘on the way out’.

Pensions and employer contributions

If your employer pays into a pension scheme, it’s worth joining in order to boost the value of your pension pot. If you don’t, you'll have to arrange a private pension independently and meet the full cost of this. 

Employers who run defined benefit (DB) schemes normally make the most generous contributions (often 15% or more), in order to fund their ‘final salary’ promise. 

Those with defined contribution (DC) schemes pay in less, but may still contribute as much as 6%. Most employees pay into both types of scheme as well, with their contributions getting a significant boost from their employer .

Special considerations

For some people, joining a company scheme might not be such a clear cut option :

• If you don’t anticipate staying with the firm for more than a few years: if you leave before reaching retirement age, you may have to leave you money invested in a preserved pension or transfer it to a new scheme. Unless you are older than 55, you can’t access fund locked up in a pension fund before retirement.
• If you're unhappy with the scheme’s investment choices: you may prefer to pay into a private pension with a wider range of funds, or a Self-invested personal pension (SIPP), where you can control investments more directly.
• If you can’t afford to pay into a pension fund: although most employees pay 3-5% into company schemes, this may be too expensive for low paid workers. Some younger employees opt out of pension saving in their early years and join later when money is less tight.

For more advice on pensions, see our book Pensions Explained, which covers state, personal and company pension funds.