Workplace Pension Schemes: Everything you need to know

As a business owner or worker who pays National Insurance in the UK, reaching retirement age affords you the right to claim your State Pension.

But with the recommended amount for a comfortable retirement falling between £260,000 and £445,000, the £168.60 a week you’ll receive from the government won’t give you the standard of living you hope (and deserve) to enjoy when you leave work for the last time.

Paying into a private pension scheme gives you the chance to put money away for retirement and build on the foundational funds provided by the State Pension. And with the introduction of mandatory workplace pensions through automatic enrolment, the government has made it easier than ever to save.

In this post, we’re going to cover everything you need to know about the private workplace pensions schemes used by thousands of employers and millions of employees across the UK.

We’ll talk about how they work, how to enrol your workers as an employer, how they affect you as an employee, and the ways you can use them to build substantial savings.

Note: ⚠️ The Coronavirus has caused the stock markets to fall and remain unstable. It’s important to note that pensions are long-term investments and the stock market will recover in due time. If you have several years before you will be ready to withdraw your pension, the best advice is to leave your money where it is. If you are over 55 and considering accessing your pension pot, you could miss out on an increase if and when the markets recover. You also need to be aware of how to protect yourself from a pension scam. Before making any decisions, speak with a professional. Anybody that has COVID-19 questions should visit The Pension’s Advisory Service Coronavirus page. 

Table of contents

What is a private pension plan?

A private pension plan is a pot of money that both employees and employers pay into to help private workers save for retirement.

A public pension plan is reserved for public sector employees, such as teachers or people who work for the NHS.

Both private and public pension plans are separate from the basic State Pension that is paid out by the government to people who have paid or been credited with National Insurance contributions.

Top Tip: National Insurance contributions are what every eligible person in the UK must pay in order to qualify for their State Pension and other government benefits.

Anybody over the age of 16 must pay NICs if they are self-employed and making a profit of £6,365 or more a year or an employee earning a weekly wage of £166 or more.

Most people make their National Insurance contributions through their Self Assessment tax bill. To learn more about NICs and how to properly make contributions, read our simple guide to small business tax.

What makes pension plans different to simply putting money aside in a savings account is that pension plans receive tax relief.

The reward of tax relief does come with various rules though, such as not being allowed to withdraw your pension until you reach 55 years of age. We’ll discuss all of the rules surrounding tax relief within private pension plans as well as how to transfer and withdraw your pension pot later in this article.

Of course, putting money aside for your future means that you will have less disposable income in the present. Because of this, it’s helpful to create budget plans to ensure you have plenty of money to live comfortably now, while still putting enough away for a cosy retirement.

You can use an online pension calculator to play around with how much you will have in your pension pot at withdrawal age based on how much you put away today. Run through several different scenarios to figure out how much makes sense for your lifestyle today and your retirement goals.

Types of private pensions

There are two main types of private workplace pensions: defined contribution and defined benefit.

A defined contribution plan allows employees and employers to contribute money to the pension in regular batches over an extended period of time. In many cases, the employer matches the amount that the employee contributes until they reach a specified limit.

A defined benefit plan, conversely, projects a specific amount that will go into the pension based on certain factors, such as the employee’s salary amount and length of employment. 

The defined contribution plan awards more flexibility as it allows the employee to choose where and how to invest their contribution. In the defined benefit plan, that choice is left entirely up to the employer.

Both of these private workplace pension types can be managed in one of two ways: by the employer themselves, or within a master trust. We will explain what a master trust is in the following section.

The five largest private workplace schemes in the UK are all master trusts. We will compare these schemes later on in this article.

What is a master trust?

A master trust is an occupational scheme that can be used by multiple employers.

Unlike a traditional contribution pension scheme, which is used by a single employer and its staff, a master trust looks after the pension savings of numerous employers and employees, ranging from small businesses to global companies.

So as an employer, you might find other business owners you know are also members of the private workplace scheme that you use. And as an employee, you might be paying into the same large pension pot as a friend who works for a different company.

A board of trustees oversee and run the master trust investment scheme. It’s their job to work in the best interests of members and maximise savings for retirement. Their work in doing this is scrutinised by Investment Governance Committees (IGCs), which operate on behalf of the Financial Conduct Authority (FCA) to ensure pension schemes offer value for money.

What’s more, all new master trusts must be authorised by The Pensions Regulator (TPR), which makes sure trusts fulfil their duties to scheme members.  

However, while major decisions such as the control of investments and performance of service providers are made by the board of trustees, employers can decide how much to contribute and all members who are confident in investing can self-select from their pension investment fund.

What is automatic enrolment?

pension auto-enrollment graph

Before 2012, it was up to an employee to decide whether they wanted to join a workplace pension scheme. But this all changed when the government introduced automatic enrolment as a way to compel more people to save for retirement.

As of February 2018, under the Pensions Act 2008, all employers in the UK have been required to offer auto-enrolment to their eligible employees. By having employers automatically pay into a pension pot, saving becomes more financially attractive for employees and allows them to build significant funds over time to live off of in retirement.

So whether you own a business with one or 1,000 members of staff, you must pay attention to the auto-enrolment rules to ensure you are awarding eligible workers with their right to enlist in a workers pension scheme.

As a general guide, as of January 2021 employers are required by law to pay into their employees’ pension pot unless an employee earns equal to or less than £520 a month, £120 a week, £480 over four weeks, or £6,240 in a year.

However, it’s a bit more complicated than that. Let’s dive into the specific categories of workers and how that affects their bid for enrolling in a workplace pension scheme.

The different categories of workers

Not every type of worker is eligible for automatic enrolment. However, workers who don’t fall into the category of automatic enrolment may voluntarily enrol in a workplace scheme.

These categories exist to classify workers by age and earnings. Workers that meet the eligibility criteria will be automatically enrolled by their employer and don’t need to take any further action.

Other workers who do not meet the minimum qualifications for automatic enrolment must take action in order to become enrolled.

The different categories of workers are as follows:

Eligible jobholders

  • Aged between 22 and State Pension Age
    • Earn over the minimum earnings threshold (at least £10,000 a year)
    • Work, or ordinarily work in the UK and have a contract of employment
    • For employers: These workers must be automatically enrolled in your workplace pension scheme

Non-eligible jobholders

  • Aged between 16 and 74
    • Earn less than earnings threshold (£10,000 a year), but more than the lower earnings threshold (£520 a month, £120 a week, £480 per four weeks, £6,240 a year)
    • Work, or ordinarily work in the UK and have a contract of employment
    • For employers: You are not required to automatically enrol these workers, but if they choose to opt-in, you must enrol them in your workplace pension scheme


  • Aged between 16 and 21 or aged between State Pension Age and 74
    • Earn over the minimum earnings threshold (at least £10,000 a year)
    • Work, or ordinarily work in the UK and have a contract of employment
    • For employers: You are not required to automatically enrol these workers, but if they choose to opt-in, you must enrol them in your workplace pension scheme

Entitled workers

  • Aged between 16 and 74
    • Earn the minimum earnings threshold or less (£520 a month, £120 a week, £480 per four weeks, £6,240 a year)
    • Work, or ordinarily work in the UK and have a contract of employment
    • For employers: You are not required to automatically enrol these workers and if they choose to opt-in, you are not required to enrol them

If a worker does not fit into one of these three categories (e.g. a self-employed freelancer), they do not have any right to become enrolled in a workplace pension scheme. Those workers are responsible for saving towards retirement in their own way, such as using a personal pension scheme.

Employee Earnings 16 – 21 22 – State pension age State pension age – 74
Less than or equal to £6,240 in a year.*
Entitled worker Entitled worker Entitled worker
Over £6,240* but no more than £10,000.00* Non-eligible jobholder Non-eligible jobholder Non-eligible jobholder
Over £10,000* Non-eligible jobholder Eligible jobholder Non-eligible jobholder

*These figures are for the 2020-2021 tax year.

Employer responsibilities

As an employer employing staff, it is your legal duty to enrol your staff into a workplace pension scheme. Those duties start from day one, which is called the staging date. You are required to set up your pension scheme within six weeks of your staging date.

Here’s your order of operations as an employer:

  1. Choose a pension scheme
  2. Figure out which staff are eligible for your scheme
  3. Let your staff know about the scheme
  4. Declare your compliance

Let’s walk through each step.

1. Choose a pension scheme

There are many options available to choose from, and The Pensions Regular (TPR) has a list of schemes on their website that they claim are open to working with small employers.

Workplace pension schemes vary in terms of how much they cost to both you and your staff, which tax relief methods they use, the investment options they offer and any additional services provided with the package. You’ll need to consider all of these things in order to determine the right scheme for your business.

Tax relief methods

Workplace pension schemes offer one of two tax relief methods:

  • Relief at source. Tax is collected before any income is paid into the pension scheme. Think of this as a net contribution scheme. As an employer, you will first deduct income tax from your employee’s under PAYE and then you will contribute the net member contribution to your workplace pension scheme. Afterwards, you will claim the tax relief from HMRC and subsequently add that amount into the worker’s pension pot.

  • Net pay arrangements. Tax is collected after any income is paid into the pension scheme. Think of this as a gross contribution scheme. As an employer, you will make your worker’s pension member contributions and then you will calculate income tax on the remaining earnings.

People who earn under the personal allowance and are not required to pay tax do not get a pension tax relief if they are enrolled in a net pay arrangement scheme. But, they do get tax relief if they are enrolled in a relief at source scheme.

These are the most up to date income tax rates and bands:

  • Basic-rate taxpayers get 20% pension tax relief
  • Higher-rate taxpayers get 40% pension tax relief
  • Additional-rate taxpayers get 45% pension tax relief

Income tax bands and rates (these are different if you live in Scotland)

Band Taxable income Tax rate
Personal Allowance Up to £12,500 0%
Basic rate £12,501 to £50,000 20%
Higher rate £50,001 to £150,000 40%
Additional rate over £150,000 45%

Example of amount paid into pension pot based on tax rates

Your tax rate You pay HMRC pays Total paid into pot
Basic £80 £20 £100
Higher £60 £40 £100
Additional £55 £45 £100

Investment options

You also have to think about where your chosen pension scheme will invest your workers’ money. Pensions should be invested sensibly and in a way that provides your workers with an optimal return.

You’ll also want to consider the investment choices that the pension scheme offers to your staff.

For example, if you have chosen to enrol in The People’s Pension workplace scheme, your staff will have the option to invest in balanced, cautious or adventurous funds:

  1. Balanced. Split across four investment areas – 66% in equities (shares), 20% in gilts and corporate bonds, 7% in property and 7% in infrastructure
  2. Cautious. The least risky option, split into two investment areas – 60% in equities and 40% in gilts and corporate bonds
  3. Adventurous. The riskiest option, split into five equities investment – 25% in UK shares, 25% in U.S. shares, 25% in European shares, 12.5% in Japanese shares and 12.5% in Asia Pacific shares

Profiles are classified by risk so that employees can see which offer the potential for higher returns and which are a more stable bet.

Consider the scheme that will give the most benefits to your employees and work in their favour, both in terms of tax relief and investments. 

2. Figure out which staff are eligible for your scheme

The next step is to figure out your workers’ classifications to see who needs to be put into a pension scheme through your business.

As discussed in detail above, you will need to assess your staff based on their age and earnings.

Gross Earnings Age 16 – 21 Age 22 – SPA* Age SPA* – 74
Over £833 a month
(Over £192 a week)
Type 2 Type 1 Type 2
£833 a month or less
(£192 a week or less)
Type 2 Type 2 Type 2

*State Pension Age.

  • Type 1: Staff who must be put into a pension scheme. You must pay into it.
  • Type 2: Staff who don’t need to be put into a pension scheme

If you employ seasonal staff or temporary staff members, you must assess their status every single time you pay them to see if their earnings meet the qualifying standards.

3. Let your staff know about the scheme

You must inform your staff about how auto-enrolment will, or won’t, affect their pay within six weeks of your duties start date.

It’s your responsibility to inform all of your staff about their worker classification and let them know that they either will be automatically enrolled or will not be automatically enrolled in your chosen pension scheme.

This gives your eligible staff the time they need to choose how they prefer to invest their pension funds, or to opt-out, and allows time for non-eligible staff to voluntarily opt-in should they desire.

TPR has several templates available for these communications to help you pen an effective letter. Alternatively, many workplace pension schemes will offer to do this on your behalf, and field any questions about the scheme to avoid confusion.

4. Declare your compliance

Then, you must complete an online declaration of compliance in order to relay your employees’ statuses to The Pensions Regular (TPR). You have five months from your official staging date to complete this step.

You cannot start this process until you receive a letter from TPR that includes your unique code and PAYE reference. On top of that, you will need to compile all of your staff information as well as your chosen pension scheme’s details in order to complete the form.

TPR has a helpful checklist to help you prepare everything you need to complete your declaration.

Once you have everything organised, the declaration of compliance can take as little as 15 minutes to complete.

For employees: How much can you contribute to your pension?

Pension contributions normally come from the employer, the employee and the government. But as an employee, you can increase contributions to grow your retirement fund.

According to the most up to date government guidelines, employers using automatic enrolment schemes must contribute a minimum amount of 3% and employees must contribute a minimum of 5% for a total minimum contribution of 8%.

These percentages are based on total earnings between £6,240 and £50,000 a year before tax. Earnings include:

  • Wages or salary
  • Bonuses and commission
  • Overtime pay
  • Statutory sick pay
  • Statutory maternity, paternity or adoption pay

For example, if you earned £25,000 a year before tax, your employer would make pension contributions of £750 a year and you would make contributions of £1,250 a year, totalling £2,000 a year in the pot.

As discussed above, these contributions are separate from the State Pension, which is based on National Insurance contributions. A private workplace pension scheme is meant to be paid out in tandem with the National Insurance payout.

Making extra contributions

You are allowed to increase pension contributions through your employer and add voluntary contributions to your pot via direct debit. Voluntary contributions can also be made by family and friends.

But there is a limit on the total amount that can be saved in a year and the tax relief that can be received. According to HMRC, the annual allowance for pension contributions is £40,000. To get relief, contributions can be no higher than the amount earned in a year, or £3,600, whichever is greater.

For example, if your salary is £25,000, this is the most that can be added across all pensions and receive tax relief.   

If contributions exceed the annual allowance in a year, no tax relief will be applied to anything above the limit and an annual allowance charge will be added to the rest of your taxable income for the tax year in question. However, in some cases, it’s possible to carry forward unused annual allowance from the previous three tax years, which can reduce the annual allowance charge.

To use carry forward, you need to:

  • Earn at least the amount you want to contribute in the current tax year (unless your employer is making the contribution). For example, if your earnings are £25,000, you can only contribute £25,000 and be eligible for tax relief on it.
  • Have been a member of a UK-registered pension scheme in each of the tax years that you wish to carry forward. The State Pension does not count as a registered pension scheme. 

Top Tip: To see how much you can carry forward or to check if you have an annual allowance charge, use GOV.UK’s pension annual allowance calculator.

Can you opt-out of a workplace pension scheme?

While it is compulsory to opt in to a workplace pension scheme, it is certainly possible to opt-out at any time.

If you opt-out within the first month of the scheme, the contributions you made in that time will be refunded as if you were never enrolled in the first place.

If you choose to opt-out after the first month has come and gone, the contributions you made will stay in your pension fund until retirement.

To opt-out, you need to contact your employer and ask what their specific processes are. Usually, employers will have you submit an opt-out form. On the form, you’ll need to fill in the contact details for your pension provider, which your employer will give you.

Once you’ve left the scheme, you will be officially opted out for a period of three years. After this period has passed, if you’re still working for the same employer, they are legally required to re-enrol you in the scheme. At this point in time, you can choose to opt-out again for a further three years, and repeat the process as long as you desire.

Note: It is illegal for an employer to actively encourage any staff members or job applicants to opt-out of their pension scheme. This action is called an inducement. There is a safeguard in place to protect workers from this scenario, called “prohibited recruitment conduct” that is stated in section 50 of the Pensions Act 2008. If an employer does act maliciously, the worker can enforce their rights in an employee tribunal.

Why would somebody want to opt-out?

For most people, staying in the workplace pension scheme makes complete sense. Automatic enrolment is a great way to start saving for retirement and planning ahead.

But, if you have lots of debt, it may make more sense to pay that off now rather than saving for the future. Living on borrowed money can be a massive stressor in anybody’s life. Therefore, choosing to opt-out and taking the money that would have been set aside for retirement and using it to pay off current debt may make more sense until the debt is cleared.

Can you opt back in after you opt-out?

You can opt back into your workplace pension scheme at any time after you’ve opted out. However, if you choose to opt-out and then back in within a 12 month period, your employer does not need to accept your request to opt back in during this time.

After 12 months have passed, your employer will be required to accept your campaign to re-enrol.

What if you have more than one job?

Eligible jobholders that hold multiple jobs will be automatically enrolled in the pension scheme of each separate employer.

As this may become confusing to track, you can choose to combine your pension pots throughout your lifetime. For example, if you leave one of your jobs, you can roll that pension scheme into one of your remaining active schemes.

Or, you can leave them alone until you reach an age where you can begin withdrawing your benefits.

When can money be taken from your pension?

With a personal pension scheme, you can start drawing money from your pot from the age of 55. You do not need to stop working to begin withdrawing money.

However, you must have a ‘selected retirement age’. This is based on the State Pension age by default but can be changed if you and your employer have agreed upon a set retirement age.

Taking from your pension pot before the selected retirement age will affect how much you receive when you retire.

It’s also worth mentioning that you don’t have to take your pension when you reach your selected retirement age. You can leave the money in the pot for as long as you want or until you need it.

Withdrawing from your pension fund

When you do decide to take money out of your pension fund, 25% of it is tax-free and 75% of it is taxed. This is because 75% is considered earned income and therefore must be taxed like any other earned income stream.

So, while you don’t pay tax on your pension contributions up to a certain limit, and even receive tax relief from the government for these contributions, you do pay tax when you withdraw the funds.

For example, if you decide to withdraw £40,000 from your pension fund, 25% of that will be tax-free.

£40,000 x 25% = £10,000

£10,000 is tax-free, but you still need to pay tax on the remaining 75%, or £30,000.

As the basic tax rate is 20%, you will pay 20% tax on the £30,000.

£30,000 x 20% = £6,000

Therefore, you will end up with £34,000 of your £40,000 withdrawal after you pay £6,000 in tax.

tax free pension example

Does Brexit affect workplace pension schemes?

Brexit will not have a large effect on UK based workplace pension schemes because they follow UK legislation.

UK law also requires for workplace pensions to be paid overseas. If you are moving or retiring abroad, you do need to tell the government office that deals with workplace pensions about your plans. 

If you move to live in another EU country, the EEA or Switzerland, your UK State Pension will continue to be increased each year in the EU in line with the rate paid in the UK. You can also count relevant social security contributions made in EU countries to meet the qualifying conditions for a UK State Pension.

What about personal pensions from a UK provider?

Your pension provider should have made plans to ensure you can still get payments from your annuity or personal pension post Brexit.

See the Financial Conduct Authority guidance to learn more.

The five largest workplace pension schemes

As mentioned above, the five largest workplace pension schemes are all master trusts.

These trusts have exponentially grown in popularity since 2012, in large part thanks to auto-enrolment. Today, these five schemes have been chosen by 758,327 employers and they manage the pensions of more than 13 million members amounting to an excess of £17 billion.

Let’s take a look at how these schemes stack up:


NEST accounts for over half of the UK workers who are enrolled in a workplace pension scheme.

They offer a selection of five investment strategy options for employees: default growth, higher risk, ethical, lower growth, Sharia-compliant and pre-retirement. They report that 99% of their members are in the default category. This selection spreads funds across a selection of investment profiles that are both high and low risk.

NEST is completely free for employers to use, which makes it a very attractive option. They also offer one simple charging structure for their members and do not charge any fees for transferring money into or out of their pension scheme.

NOW: Pensions

NOW: Pensions chooses to operate only one investment strategy for its members; the Diversified Growth Fund. This means that members do not have any choice in how they want to invest their funds.

They do this because they are confident that their multi-asset diversified strategy will deliver good returns every single time. And, they believe that offering too many investment fund choices can be both confusing and overwhelming for members. So, they’ve removed the choice and put forward what they consider the best option.

NOW: Pensions pride themselves on having low costs and avoiding needless fees and charges.

Legal & General operates in the exact opposite fashion: They offer 16 funds to choose from. While the default option is the most popular, they believe that their members should have as many choices as possible in order to find the fund that works best for their individual needs.

They also pride themselves on providing effective membership communication and acting as ongoing advisers to both members and employers to reduce confusion and simplify monitoring needs.

The People’s Pension

The People’s Pension has the second-highest number of members in the UK (after NEST).

They also offer a variety of investment options, including ethical and Sharia funds, high-risk 100% global equities, medium/high-risk 85% global equities, medium-risk 60% global equities, medium/low-risk pre-retirement, medium/low-risk annuity and low-risk cash.

TPP has won a number of awards for customer service, product knowledge and auto-enrolment. They have a low set up charge for employers and only charge a 0.5% annual management fee for employees.

Standard Life

Standard Life has been operating since 1974, making it the oldest master trust in the top 5.

They take the cake for offering the most options for investments; 18 different funds. They want their members to have endless possibilities when it comes to how to invest their money, and they want that choice to be made by the members themselves.

Wrapping up

Private workplace pension schemes, with the help of auto-enrolment, help to guarantee that eligible workers in the UK are saving for retirement.

As an employer, it’s important that you understand your duties in terms of choosing an effective scheme, understanding your employee’s various worker classifications and carrying out your auto-enrolment responsibilities.

As an employee, it is up to you how much time and energy you want to put into your private workplace pension scheme. You can reap the benefits of being auto-enrolled into a default investment fund, or, if options permit, play around with investing in higher-risk funds to potentially reap a bigger reward.

For both employers and employees, workplace pension schemes are something you need to discuss early on to avoid any confusion and ensure that each party is reaping the full benefits of these tax-relief investments.

Photo by Andrea Piacquadio, published on Pexels

Emily Bates

Emily Bates

Lead Talent Partner

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