Published June 2023
The key difference between a workplace and private pension is that the former is set up by an employer for their employee and the latter is set up by an individual for themselves.
With a workplace pension the employer will have the responsibility for organising and setting up the pension and dealing with the administration. In most cases the employer will make monthly contributions into the pension with the employee also having to make a contribution. There are rules in the UK (called “auto-enrolment) which compel companies to set up and enrol relevant employees in a compliant pension plan.
Most pension these days are “Defined Contribution” type pensions, where the contributions are built up over time and often invested. The other type are “Defined Benefit” or “Final Salary” schemes (click here to see if you have a Final Salary Pension) where the pension pay-out is generally based on the employee’s time in the job and their salary over that time. This article will refer to Defined Contribution pensions only.
With a personal pension an individual sets up and manages the pension, including choosing the type of pension, the provider and the investments to go into the pension.
A common question is if a private pension would be better than the one offered by someone’s employer. Many are faced with this exact choice, especially as due to auto-enrolment, many more employers are offering a workplace pension scheme.
There are a large number of private pensions, with different structures, rules, costs and benefits. And yet there are an even larger number of workplace schemes, as each workplace not only has its own scheme but their own rules on what and how contributions are made. Although many workplaces offer the minimum required contribution, many will offer a higher level of contribution, often in return for the employee also increasing their contributions.
So although a direct comparison between private and workplace pensions isn’t possible, simply due to the large number of different versions of each, there are a few key differences to look out for.
Employers will often pay a contribution into their employees workplace pensions (indeed they often have to by law) and for those covered by the Auto Enrolment laws, which should be most employees, this is a minimum of 3% of the employee’s salary. Many employers will pay more than this however, often matching any increases in the employees own contribution, up to a point.
These extra contributions can often be seen as “free money” and would not be received in a private pension (apart from the situation where your employer agrees to pay into a private pension). If for example you were to opt out of your employers pension plan, then you would no longer need to make your employee contribution, but you would lose the employer’s contribution as well. Most employers would not replace this contribution with an increase in salary, so this extra contribution is lost forever.
Both the cost of running your pension and the running costs of the investment funds that your money is invested in need to be considered. Higher costs can eat away at your returns over time, although you may be happy to exchange some extra costs for the chance of better performance or to invest in something more in tune with your own views (such as green or ethical investments). The costs of workplace pensions can vary wildly, with some employers offering very low-cost pensions as a benefit to their employees and others deciding that the employees should bear all the cost of the pension with higher fees as a result. Fees should be fairly straightforward to compare across workplace and potential private pension providers, once you have found what they are. You may need to contact your workplace scheme for more information if you do.
Many workplace pension schemes have a limited number of choices as to where you can put your money. Although they may offer a range of investments, it is often the case that this is in a small number of specially selected investment funds to which you are limited to. This is in contrast to the many personal pension providers that offer a very large range of thousands of investment choices. On the extremes, some employers offer as much choice as a personal pension where some offer no choice at all. Your workplace pension provider should be able to provide you with the details.
At the point of retirement, when it becomes time to start to draw from your pension, there are a wide variety of ways that most pensions can be accessed. However, many workplace schemes only offer the choice of an annuity purchase at the point of retirement. If they do offer alternatives (such as Flexi Access Drawdown) then the fees and ease of access should be compared to other providers that may be able to offer more flexibility of options and/or lower costs. Workplace schemes (with a few exceptions such as NHS and Teachers DB pensions) have to offer you the option to move your pension funds and transfer to another provider. You are then able to choose from a range of private pension providers that offer a lot of flexibility when it comes to accessing your money when the time is right.
In summary, it depends on what workplace pension you have to be able to work out if a private one is better, but it is worth looking into for most people. And there is also the option of having both; a workplace scheme and an additional private one of your own.
It can be a bit more of a challenge to arrange a workplace pension as a self employed individual. As you are technically your own employer, you are the one responsible for the set up and ongoing administration of the pension.
A workplace Defined Contribution pension fundamentally works in the same was as a personal pension. The differences are usually around whom the provider is, the costs, what investments are available and how it is accessed.
So in short, yes it is possible to have a defacto workplace pension if you are self employed. However, it will essentially have to be set and managed by yourself, including the need to find a suitable provider and pension.
Auto Enrolment is a government scheme that requires employers to automatically enrol their eligible employees into a workplace pension scheme. It was introduced as part of the Pensions Act 2008* and started to roll out from 2012.
Under auto-enrolment, both employees and employers contribute to the pension scheme, with the aim of encouraging more individuals to save for their retirement. Eligible employees are automatically enrolled into the scheme unless they choose to opt out.
To be eligible for auto-enrolment, employees must be:
Employers are required to contribute a minimum percentage of the employee’s qualifying earnings into the pension scheme. “Qualifying earnings” includes earnings between £6,240 and £50,270 per year (for 2023/24). The contributions for 2023/34 are:
It’s important to remember that these are the minimum requirements, and employers and employees can choose to contribute higher amounts if they wish. The auto-enrolment scheme aims to ensure that more workers have access to pension savings and help them prepare for retirement. But as discussed above, if you are self-employed then you are not automatically covered by auto-enrolment.
It is difficult to definitely say which is better, a workplace or personal pension, as there are so many different versions of each.
The costs of each and the investment choices offered is one way of comparing a particular scheme to another. Being aware that employer’s contributions might not be made into a personal pension is another important factor to consider when comparing. Although if it is an ex-employer, then there is unlikely to be any more employer contributions being made.
There is also the consideration that with a workplace pension the burden of setting up and administering is met by the employer, making like a little easier for the employee.
Ease of access when coming to access your pension is also something to consider and it’s important to remember that you can switch your pension in most cases and generally with no or little cost required.
If you would like some more information then please get in touch on 01173 823 823. Leaf Financial Advisers are Bristol based pension advisers and we can help with any questions you may have.