A pension scheme is a private pension that provides an additional source of income after workers are no longer able to work. Although this tends to be at state pension age, it can in fact be younger, should someone be forced to retire due to ill health. In this article we’ll look into:
- Pension scheme types
- Do UK companies have to provide a pension scheme?
- Opting out of a pension scheme
Main types of pension scheme
There are 2 main types of pension schemes. The amount of cash someone receives from a defined contribution pension scheme boils down to how much money they have put into it. A defined benefit pension scheme has various rules and the amount someone actually receives as a pension pot often depends on their salary, and the number of years they have worked for their employer.
Do all UK firms have to provide a pension scheme?
After recognizing the fact that most British workers aren’t saving enough for their retirement, with increasing life expectancy and the simple inadequacy of the state pension to cover the financial needs of retirees, the government brought in the Pensions Act of 2008. This legislation started the compulsory auto-enrolment for all full-time employees into a workplace pension set up by their employer.
Your employer must enroll you for a workplace pension if you suit the following criteria:
- Over 22 years of age but under the state pension age
- Earning over £10,000 a year
- Working in the UK with an employment contract
Contributions for the workplace pension scheme are taken each month via the PAYE system, and employers must also make their own financial contribution for all employees.
You can still join the pension scheme if you earn under £10,000 a year. However, your employer isn’t obliged to contribute. Once you have been enrolled, your employer tell you, in writing, about key information about their pension scheme. This should include:
- The date enrolled, the type of scheme and also the name of the provider
- How much you and your employer’s contributions will be
- How to opt out of the pension scheme, should you decide to
How do you opt out of a pension scheme?
To opt out of your pension scheme, you must inform your employer/HR department. You will likely be given a form to fill in, which must be given back either to your employer or directly to the pension provider itself. If you choose to opt out within the first month of auto-enrolment, you will be refunded all of the money which has been paid into the pension pot on your behalf within the first month. If more than a month has been paid, you won’t be able to access this money until you reach the age of 55, at least. For more information, seek specialist pension advice.
Your opt-out decision is valid for 3 years. You will then be auto-enrolled again before deciding to opt out again. The reason for this is to give people a chance to re-consider their decision as they push closer to state retirement age. Before you decide to opt out, you should fully consider all of the implications. Apart from a private pension, you may also miss out on payments for forced retirement due to ill health and/or benefits that your dependents will receive if you die.