The UK pension law changed in 2012 after the government acknowledged a problem that on average, people were not saving enough into pension schemes to pay for life in retirement. To remedy this, workplace pension laws were introduced in the UK.
What is the UK Pension Law?
The pension law in the UK states that all employers must offer their staff a pension scheme which both parties pay in to.
A percentage of an employee’s wage is automatically added to their pension fund every payday – the amount must be shown on the person’s payslip along with their tax and National Insurance contributions. Employers must also pay a percentage into the fund at the same time.
What happens after being enrolled into a UK pension?
Information regarding a workplace pension account must be communicated to the employee in writing. They should be told:
- Who runs the pension scheme
- The date they were added to the scheme
- How much will be contributed by both parties
- How to leave the pension scheme
- If/how tax relief applies
Must everyone have a workplace pension?
Workplace pension laws in the UK state that a pension must be offered to all employees who meet the required criteria. Workplace pensions work on an opt-out basis, meaning that staff members are automatically enrolled but they can choose to opt-out if they don’t want an arranged pension.
Reasons to opt-out
An employee might choose to opt-out of the workplace pension scheme for a range of reasons including:
- The employee already has an arranged, private pension fund and does not want an additional one
- The employee has decided they would prefer to keep the money that they would pay in for personal reasons
If an employee has been automatically enrolled and they wish to opt-out, if they do so within one month they are entitled to have any funds that they have paid into the scheme returned to them. After one month the funds will likely have to stay in the pension scheme until the employee reaches retirement age.
Anyone who opts out will be invited to automatically enrol again after three years, but it’s always possible to opt out.
Who is eligible to join a workplace pension in the UK?
Most workers in the UK are eligible to join a workplace pension scheme; however there are certain criteria that must be met:
- The employee must earn a minimum of £10,000 annually
- The employee must be aged between 22 and State Pension age (this can be worked out with the uk calculator)
- The employee ordinarily works in the UK
- The employee is classed as a ‘worker’ according to UK law
There are also other reasons why an employer might not have to automatically enrol an employee:
- The employee or employer has already given notice to terminate the employment contract
- The employee is still in a three month probationary period (enrolment can be delayed up to three months)
- The employee is from an EU country and already in an existing EU cross-border pension scheme
- The employee is already in a pension that meets the automatic enrolment rules, that has been arranged by the employer
- The employee has evidence of a ‘lifetime allowance protection’
In instances such as these, it’s still usually possible for employees to join a UK workplace pension scheme should they wish to.
Who pays in to the UK pension scheme, and how much?
The amount that must be paid into the scheme by both parties will differ according to the chosen pension scheme. As of April 2019, however, the minimum is 3% for employer contributions and 5% for employee contributions.
This makes a total of 8% of an employee’s salary, which is the compulsory minimum. If an employer pays in more than 3%, the employee can pay a lower percentage to make up the difference – as long as the total is 8%.
Can an employee choose to pay more into the scheme?
Some employees may wish to pay more into their pension pot in order to have more funds to access when they reach retirement. Employees can choose to pay in as much as they like – up to 100% of their salary if so desired – and this will have no impact on the amount due from the employer. The employer will always need to pay in a minimum of 3% of the employee’s salary.
Does the government pay into the scheme?
The government may contribute towards a workplace pension in the form of ‘tax relief’. ‘Tax relief’ means that some of the money an employee would have paid to the government as tax is paid into the scheme instead. Most workplace pension holders will qualify to receive tax relief as long as they pay tax, however the way this is paid will depend on the specific pension scheme.
Do UK pension laws protect the workplace pension fund?
Yes, the funds in an employee’s workplace pension are protected by the FSCS (Financial Services Compensation Scheme), as long as the provider was authorised by the Financial Conduct Authority. This means that if the pension provider goes out of business, compensation will be paid by the FSCS.
As workplace pension schemes are run by third party providers, and not employers, employers cannot access their employees’ funds for any reason.
It’s important to note, however, that pension providers use pension funds for investments, and so the amount saved will likely fluctuate. The investments will vary in risk, however usually when an account holder is approaching retirement age, the provider will move their funds into a ‘low-risk’ investment.
When can an employee access their pension?
Most pension providers stipulate an age limit for when an account holder can access their pension pot; this is usually between age 60 and 65.
It might be possible to access a pension pot early, however, the funds will be heavily taxed. The earliest age is usually 55 and the payable tax can be anything up to 55%.
25% of the funds in a workplace pension scheme are usually paid out tax-free however the remainder will be subjected to income tax.
Workplace pension laws UK – FAQs
Pension law in the UK is extensive and complex, and most employees and employers alike find they have new questions all the time. Here are some of the common UK workplace pension scheme queries.
What happens to a pension when an employee gets a new job?
When an employee leaves a job, any existing workplace pension funds will remain theirs, and can be accessed when they are of retirement age.
In instances where an employee has had multiple pension schemes, it might be preferable for them to combine their pension pots. The employee will need to contact the providers in order to arrange this.
Is it possible to locate an old pension?
Yes, gov.uk offers a Pension Tracing Service with which it’s possible for employees to find details of old pension providers that they might have accounts with.
Can an employee rejoin a pension scheme after opting out?
Yes, an employee can request to opt-in to the scheme at anytime. An employer can refuse this however, if the employee has opted in and then opted out in the last 12 months.
Who needs to inform the pension provider of changes to personal details?
It’s up to the employee to communicate with the pension provider if there is a change in their personal details, such as in the event of a name change or new address.
Does a workplace pension replace a state pension?
No, a workplace pension is entirely separate to a state pension. A state pension will be paid out on a weekly basis when an employee has reached retirement age. The amount payable will differ according to the National Insurance payments they have made throughout their life, but at the time of writing, the maximum amount is £168.60 per week.
Fully understanding UK pension laws is imperative for business owners and HR/payroll professionals. For assistance in other aspects of UK employment law, see our guides to everything from Statutory Sick Pay to Statutory Maternity Pay.