MSE’s Academy of Money
MSE’s Academy of Money

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3.2 Occupational schemes: they work like a pay rise

All employers now must automatically enrol their eligible employees – currently those aged 22 years or older and who earn at least £10,000 per annum – onto a workplace pension scheme. This may be the employer’s occupational scheme or an alternative (particularly in the case of smaller businesses).

The figure is a photo of a retirement party at a workplace. The man retiring holds a cake. His colleagues are raising their glasses to him.
Figure 5 Life after work

If employees do not want to be enrolled onto a workplace pension scheme offered by their employers they have to take action to opt out. As a result of this arrangement, inertia results in employees becoming (and remaining) enrolled onto a pension scheme. Automatic enrolment has resulted in a huge increase in participation in pension schemes – this rose from 47% of employees in 2012 when automatic enrolment started to 77% in 2017 (ONS, 2020).

Automatic enrolment is an important initiative to get people to contribute to a pension plan, although some criticisms have been voiced about the scale of the fees levied on those enrolled onto schemes.

A big benefit of a workplace pension is that the employer has to contribute to the pension. Under auto enrolment, the employer must contribute at least 3% of your salary (within certain limits), which is a bit like a pay rise – though you will only see the money when you come to draw on your pension in later life. Employees must contribute a minimum of 5% of their salaries.

Additionally, as you saw in the earlier video, you get income tax relief on your contributions to your pension. This applies to defined benefit as well as defined contribution (or money purchase) schemes. Later in the session you’ll learn more about the tax rules that apply to pensions.

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