Company pensions explained Should I join my company pension scheme?
When you're asked to start contributing to your company's pension scheme, it's easy to be put off - after all, you'll be taking a pay cut.
But saving into a pension is one of the most sensible financial steps you can take - not only are you putting something aside to have a comfortable life in the future, you're also getting free money from the government and your employer for doing so.
This guide explains exactly why you should join your company's pension scheme.
Pension saving is tax efficient
Both defined benefit (DB) and defined contribution (DC) pension contributions benefit from tax relief. This means that they're taken from your salary before any tax has been deducted.
With group personal pensions or stakeholder schemes, your contributions are treated as net, even if your employer collects them direct from pay and passes them to the provider. The provider then claims the basic rate relief and adds it to your pension.
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 deduction – so it’s worth the full £100.
For 40% taxpayers, the impact is even greater. If you’re in a DC pension scheme, this is particularly significant as it boosts the size of contribution going into your pension. This means you can buy a bigger annuity when you retire.
Go further: Tax relief - understand more about how tax relief works
If your employer contributes to your pension, it's free money
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 final salary schemes normally make the most generous contributions (often 15% or more), in order to fund their ‘final salary’ promise.
Go further: Defined benefit and final salary pension schemes - find out more about these types of
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.
The Pension Quality Mark (PQM) - a benchmark for DC pension schemes - says that total contributions should be at least 10%, of which 6% comes from the employer.
Under the government's auto-enrolment rules, total contributions must be at least 3% of an employees earnings - of which the employer’s contribution must be at least 1% - until 2017. This will continue to increase until total contributions are 11% from 2018 onwards.
Go further: Pension auto-enrolment - the ultimate guide to the new pension saving scheme
Watch out for good governance
Regular, transparent communication is also a sign of a good workplace pension scheme. You can get details on contributions and investment from your employer, usually via the HR department or the scheme trustees.
If you’re a member of a trust-based defined contribution scheme, the trustees are liable if anything goes wrong. They should be regularly reviewing the scheme to ensure it’s fit for purpose.
If you’re in a contract-based defined contribution scheme, such as a group personal pension (GPP), in which a firm employs a pension provider to run the pension scheme, there’s no requirement for governance. However, a good employer should monitor scheme performance.
Know your rights: Who do I complain to about my pension scheme? - what to do if you're unhappy your pension
Watch out for a good investment strategy
Workers with decades to go before retirement will have time for their money to recover from poor investment performance. This means they should be prepared to invest in riskier asset classes such as equities.
People approaching retirement need to preserve the value of their pension pots rather than take investment risks, because they could jeopardise their retirement income. For this group, higher exposure to low-risk investments (such as cash) is a good idea. If you're going into income drawdown, so-called 'lifestyling' or moving into less risky investments will be less important.
Go further: Beginner's guide to investment - find out the basics of investing your money.
- Income options under the 2015 pension rules - how the new pension freedoms could affect your income
- Should I consolidate my pensions? - The pros and cons of transferring your workplace pensions
- The Which? Money Helpline - Get expert help with your company pension
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