When you begin a new job, one of the first things you're likely to learn about is the terms of your workplace pension scheme. Some companies offer a single product for all employees, while others allow you to tailor the terms depending on how much of your salary you wish to save.
But what is a workplace pension, and how exactly does it work? Here are the answers to some frequently asked questions to help you understand your rights.
A workplace pension scheme is a way of saving for your retirement that's arranged by your employer. They are sometimes called employee pension schemes, occupational pension schemes, company pension schemes or work-based pensions.
A workplace pension is essentially a savings scheme that your employer regularly pays into. In many cases, you will also have the option to make additional voluntary contributions. This helps you to build up a retirement savings fund, which you can use to supplement your state pension.
The value of a workplace pension will depend on how much you pay into it over the years. Many pension schemes are put into an investment fund/s, the performance of which will also affect the final value of the scheme.
You can access your pension after you retire, usually in the form of an annuity or programmed withdrawals - a series of scheduled withdrawals similar to your workplace salary. It is not usually possible to access your pension fund before retirement.
Your employer will add money into your pension scheme via a series of regular contributions. These usually occur monthly. In some cases, the employee might also have the option of adding extra money via additional deductions taken directly from an agreed percentage of your salary.
An additional benefit offered by some companies is contribution matching: if you make a regular contribution to your pension fund via voluntary salary deductions, your employer will match what you're paying in, on top of their standard contribution. This can help your retirement fund to build up much faster.
The key benefit to you as an employee is that your workplace is contributing to help boost your retirement savings on top of the National Insurance contributions. Living on your state pension alone might prove challenging in your retirement years, so a workplace pension can help you to enjoy more financial security.
If you pay voluntary contributions into your pension scheme, you may also be eligible for certain tax credits which will be announced by the government from time to time.
For employers, the main benefit of a competitive pension scheme is that it will help them to attract and retain the best talent, increase employee commitment and boost their brand. No company wants to be known for treating their employees poorly, and a generous pension scheme often ranks among employees' top priorities when considering where to work.
Companies that offer a voluntary contribution-matching scheme could also be eligible for certain tax deductions as announced by the government from time to time.
When you set up your workplace pension scheme, you usually get access to a selection of different investment strategies or funds. You should receive regular updates on the performance of your investment, so you can make changes to your fund selection if needed.
Remember, when it comes to investments, past performance isn't necessarily a guide to future performance. The value of investments and the currency in which the funds are denominated may go down as well as up and may not return the original amount invested.
The scheme and those providing it are usually the employer's choice. However, oftenly the fund preferences are in the hands of the employee. The actual plan, its value and benefits are also for the employee to decide. If you have the option to choose from a variety of investment types, make sure you choose a level of risk you're comfortable with.
If you leave your current place of work to take up a new position, the value of your workplace pension will still belong to you. However, your former employer will stop contributing to the scheme.
If your new employer has a workplace pension scheme of their own in place, you may opt to transfer your old fund over, assuming it meets the qualifications. Alternatively, you could convert the plan into a qualifying Personal Retirement Scheme designed to receive personal contributions only. This could still leave you eligible for certain individual tax credits.
You could also stop making contributions to the plan and start a brand new one at your new company. However, this could impact the value of the plan and the benefits at retirement age. It is usually a good idea to explore options for consolidating your workplace pension plans if possible.
Under the current terms of the Voluntary Occupational Pension Scheme rules, pension plan proceeds can start being withdrawn from the age of 61 but not later than the age of 70. Usually, providers will also stipulate the minimum number of years that a plan would need to be in place before taking out any benefits.
You can convert the value of your pension fund into a regular post-retirement income in the form of scheduled withdrawals or annuities, subject to any rules that might be applicable at the time.
It is generally best to hold off on accessing your pension fund proceeds for as long as you can afford to do so - certainly until you are no longer in full-time employment. This means your pension plan has more time to grow and further payments can be made into it.
You may also be able to make limited tax-exempt lump-sum withdrawals, subject to certain conditions being met. These conditions are aimed at ensuring that there is an adequate remaining balance in the plan for programmed withdrawals or annuities.
Yes, absolutely. There are other forms of personal pension besides the workplace scheme, and you can set these up yourself and pay into them alongside your occupational plan, assuming you can afford to do so.
There's no limit to the number of schemes you can pay into, so it's certainly possible to maintain your own personal pension plan while also contributing to your workplace plan. Even so, keep in mind that there are limits to the amount of tax credit you can claim on your contributions. The current tax credit for personal qualifying schemes and occupational qualifying schemes is set to an annual maximum of €750 (or 25% of a maximum of €3,000 in contributions).
This article is not intended to provide investment advice, and is based on our understanding of legislation, tax laws and Inland Revenue practice at the time of publication. These laws and legislations may change in the future. Please speak to a tax advisor before investing in any pension plan.
This article was written by Muriel Rutland, CEO of HSBC Life Assurance (Malta) Limited. It first appeared in The Times of Malta on 6 September 2021.