Workplace Pensions: 3 Things Most People Do Not Know

Millions of employed workers currently have a workplace pension following the introduction of auto-enrolment in 2012.

The change means that have to put eligible workers into a workplace pension scheme.

For most people, their pension was set up by their employer, parked in a default fund, and has barely been looked at since.

Here is what most people are missing, and why it matters more than you think.

1) Your money is invested somewhere. (Where can mean the difference of hundreds of thousands of pounds)

When your contributions go in each month, they are not sitting in a savings account earning interest.

They are invested in a fund. And in most cases, that fund was chosen for you by your employer or pension provider when you started the job. It is called a default fund, and it is designed to be vaguely suitable for the average employee.

Which is fine as a starting point. But you are not average, you are you.

Default funds can carry more risk than you are comfortable with, or less than makes sense for where you are in your career.

They can also have higher charges than other funds sitting within the same scheme.

Our analysis found that almost 90% of default workplace pension funds are underperforming against standard benchmarks. On a £300,000 pot, the difference between the best and worst medium-risk fund over five years was the gap between ending up with £447,000 or £210,000.

The good news is that you can usually switch to a different fund within your existing workplace pension, at no cost. Log in to your pension provider’s account, or ask your HR team, to find out what you are currently invested in.

You can see how your fund stacks up against others using our pension performance checker.

2) Salary sacrifice is free money

A lot of people are not using it.

Salary sacrifice (also called salary exchange) is an arrangement where you take a slightly lower salary on paper, and your employer puts more into your pension instead. Because your salary is lower, you pay less National Insurance. Your employer pays less too. And many employers pass that saving straight back to you as an extra pension contribution.

For a basic rate taxpayer, a normal £100 pension contribution costs £100 from take-home pay. Under salary sacrifice, the same contribution can cost noticeably less, because you are saving on both income tax and National Insurance at the same time.

Not every employer offers it. But if yours does and you are not using it, you are leaving money behind every single month. Ask your HR or payroll team whether it is available.

One thing worth knowing: the government has announced that from April 2029, National Insurance relief on salary sacrifice contributions will be capped at £2,000 a year. For most people contributing at standard levels, this will not change a thing. If you contribute more, it is worth understanding what the change means for you. Use our salary sacrifice rule change calculator to work out where you stand.

3) Higher-rate taxpayers may be owed extra tax relief. (Most do not claim it.)

When you pay into a workplace pension, basic rate tax relief of 20% is added automatically. So for every £80 you contribute, £100 goes into your pot. That part is handled for you.

But if you pay the higher rate of income tax (40%), you are entitled to an extra 20% on top of that. Additional rate taxpayers (45%) are entitled to even more. Whether you actually receive this depends on how your employer’s scheme is set up.

Some schemes use a system called relief at source, which only applies basic rate relief automatically. If yours works this way and you are a higher or additional rate taxpayer, you need to claim the extra relief yourself. Either through your self-assessment tax return, or by contacting HMRC directly.

You can backdate this claim for up to four tax years. For someone contributing £5,000 a year at the higher rate, that is up to £4,000 waiting to be claimed.

To check whether you need to do anything, ask your employer whether your scheme runs on a relief at source basis or a net pay basis. That one answer tells you everything.

Use our pension calculator to see whether you are on track for the retirement income you want, and our pension performance tables to check how your fund compares to the rest of the market.

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This content is for educational and informational purposes only. It does not constitute financial advice.

Capital is at risk. Tax treatment depends on your individual circumstances and is subject to change.

If you are unsure what is right for your situation, please speak to a qualified, regulated financial adviser.