The Basics Of Pension Schemes In Britain

A pension scheme is a private pension which provides an additional source of income once workers are no longer able to work. Although this is usually at state pension age, it could be younger if someone is forced to retire because of ill health. In this article we look into:

  • The main types of pension scheme
  • Whether UK companies have to provide a pension scheme
  • How you can opt out of a pension scheme

Main types of pension scheme

There are two main types of pension schemes. The amount of money someone receives from a defined contribution pension scheme depends on how much money they have put into it. However, a defined benefit pension scheme has different rules and the amount someone receives as a pension pot usually depends on their salary, and how many years they have worked for their employer.

Do UK companies have to provide a pension scheme?

Recognising the fact that many British workers are not saving for their retirement, increasing life expectancy and the inadequacy of the state pension to cover the financial needs of the retired, the government introduced the Pensions Act of 2008. This legislation provided for the compulsory auto-enrolment of all full-time employees into a workplace pension which set up by their employer.

To opt out of a pension scheme,  you must tell your employer

Your employer has to enrol you for a workplace pension if you fit the following criteria:

  • Age: over 22 but under the state pension age.
  • Earning at least £10,000 a year.
  • Work in the UK with a contract of employment.

Contributions for the workplace pension scheme are deducted every month alongside the PAYE system, and employers also have to make their own financial contribution for every employee.
You are still able to join the pension scheme if you’re earning under £10,000 a year. However, your employer doesn’t have to contribute. Once you have been enrolled, your employer must let you know in writing key information about the pension scheme. This includes:

  • The date of your enrolment, the type of scheme and the name of the provider.
  • How much your and your employer’s contributions will be.
  • How to opt out of the pension scheme.

How can you opt out of a pension scheme?

To opt out of a pension scheme, you must tell your employer/HR department. You will be given a form to fill in which must be returned either to your employer or directly to the pension provider. If you choose to opt out within a month of your auto-enrolment, you will receive a full refund of the money which has been paid into the pension pot on your behalf. If more than a month has elapsed, you won’t be able to access the money until you reach the age of at least 55.

An elderly couple in their living room

Your opt-out application is valid for 3 years. You will then have to be auto-enrolled before choosing to opt out again. The reason for this is to allow people to re-consider their decision as they edge closer to state retirement age. Before opting out, you should consider all the implications. Apart from a private pension, you might also miss out on payments for forced retirement because of ill health and/or benefits for your dependents if you die.

You can read more about help for pensioners here.

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