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Workplace Pensions – What you need to know

workplace pensions

Pensions sound so boring, don’t they?  Well I can assure you a pension is definitely not as boring as decades of retirement with no money to enjoy it.

Sound dramatic, well I am sorry to be hard hitting, but sometimes you need to be tough to be kind.  I am not running The Money Plan for fame or vanity, I promise you.  I am running it so that I know I have done my part to help as many people as I can create financial freedom, freedom from the worries of money.

Why don’t we refer to pensions as a retirement investment?  Or long-term investment?  Or our Freedom Pot, now that’s a nice way to think of a pension, the Freedom Pot, when you have enough money to break away from the daily grind and you can live off your pensions and be financially free for the rest of your life, this is the whole outcome of the Money Plan.

In general, there are two types of pensions, defined contributions; which include personal pensions and SIPPs and defined benefits; which include final salary.  I don’t want to go into how the different pensions work, I wrote about that before.  I want to talk specifically about workplace pensions.

If you are employed your employer should have in place a workplace pension scheme, which is most likely a personal pension (although it may not be so ask if you’re unsure).

Different type of employees

The rules say there are three types of employee to consider for a workplace pension depending on your age and income, unfortunately the names the government have given the employee groups make little sense;

First group of employees are called ‘eligible jobholders’ or type 1.

Whether you work full time or part time, your employer will have to enrol you in a workplace pension scheme if you:

  • work in the UK
  • are not already in a suitable workplace pension scheme
  • are at least 22 years old, but under State Pension age
  • earn more than £10,000 a year for the tax year 2019-20

As long as you meet these criteria you’ll also be covered if;

  • you’re on a short-term contract
  • an agency pays your wages
  • you’re away on maternity, adoption or carer’s leave

The second group of employees is called the ‘non-eligible jobholder’ (I have no idea why they used this term!) or type 2.

You are not automatically enrolled, but if you ask (which you must!), your employer must enrol you and they will also contribute for free!

If you work in the UK and earn between £6,136 and £10,000 (for the tax year 2019-20) this will be you.  You must ask it’s essential folks!

The third group is call entitled workers, also referred to as type 2, which makes no sense because they are entitled to nothing!

These are people who earn less than £6,136.  Your employer must allow you access to the scheme, if you ask, but they do not legally need to contribute, although from my experience, many will.

But notice, your employer must allow you to join the pension scheme if you ask (they don’t need to contribute in some cases).  The scheme is likely to have lower charges and will be free for you to join, probably better than you could source yourself, and they have done the research for you!

Contribution amounts

The worker categorisation sets out if your employer will pay into your pension or not, then there four different amounts they could pay in, depending on how they have set the scheme up.  These amounts have increased over time and below are the amounts since April 2019;

Qualifying Earnings

The legal minimum obligation is called Qualifying Earnings.

This is where the employer pays contributions on income starting from £6,136 to £50,000.  No contributions are made on earnings below £6,136 or above £50,000 hence why it’s the minimum obligation and I feel a poor effort by employers doing this I am afraid, but that’s for another time.

The contribution amounts are;

  • Employer 3%
  • Employee 4% plus 1% tax relief so 5%
  • Total 8%

Basic salary

Basic salary is the second option, which tends to be the most common, this is where the contributions are based on the ‘basic salary’ rather than the qualifying earnings band of £6,136 to £50,000.

The percentage contribution is different at;

  • Employer 4%
  • Employee 4% plus 1% tax relief
  • Total 9%

So in this example, it’s easier to understand, most people understand what their basic pay is, but the employer would pay a larger percentage (4% verse 3%) on a larger amount of pay.

Pensionable Pay

The third is known as Pensionable Pay and this is defined by the employer and it’s often used because the definition could be ‘basic pay’ as long as the basic pay is 85% of total pay, it’s allowable.

Why would they use this?  Because the contribution amounts are lower, so an employer can say we use ‘basic pay’ but pay lower contribution amounts to achieve this;

  • Employer 3%
  • Employee 4% plus 1% tax relief
  • Total 8%

You see, as an employer you could define your pensionable pay as basic pay (as long as this is at least 85% of the total, which unless you get significant bonuses/benefits it will be) and you save 1% on our contributions!

Total Pay

The final and least often used is Total Pay, which as the name suggests, the contributions are based on all income; basic pay, overtime, bonuses etc.  The contributions are less because the amounts are more;

  • Employer 3%
  • Employee 3.2% plus 0.8%
  • Total 7%

I appreciate it can be a little ‘dry’ but I wanted to give you the inside knowledge you will probably know more than your boss on this now!

More information can be found on the Pension Service website.

Pay More

Remember you can pay in more than this, these are the requirements under workplace pensions, you can fund up to 100% of your total pay, irrespective of scheme basis your employer chose (capped at your annual allowance).

You should be aiming as a minimum to save the first working hour of your working day; an eight-hour day, 1/8 is 12.5% of your income saved for your ‘freedom pot!

Self-Employed

If you are self-employed …PLEASE PLEASE PLEASE, make sure you are in at least the same position as an employee!!  So many self-employed individuals I have met work for less than the living wage, per hour.  The living wage is £8.21, or up to £10.21 depending on your source.

If you work an 8-hour day Monday to Friday and say 4-hours on a weekend, you should be earning at least £23,000pa and therefore saving into your pension £175pm as a minimum (9% based on workplace pension rules above) or preferably £243pm (12.5% based on The Money Plan rules).

If you are earning more than this, you really should consider pensioning more.  It is not reasonable to think you can save for a 20-25 year retirement (67-90) by putting ad-hoc payments away here and there, this is a serious topic folks.

Click here for my free guide on state pensions

 
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