In this guide, we'll take a closer look at how workplace pensions work. It is a big and complex area, but there are two very vital things we must know:

• Employers pay funds into our pension. It is part of our salary, which we just miss out on if we opt out. So, if possible, try your best to never opt out of a pension.
• The sooner you start contributing to your pension, the less you need to input into it yourselves, due to the magic of compound interest.

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Always Auto-Enrol In Your Workplace Pension

Once you're over the age of 22 and earning more than £10,000 per year, you are auto-enrolled in your employer's pension plan. This is at least a 3% extra pay in exchange for you putting in 5% of your salary. These funds are put in a pension, and you can't access it until at least the age of 55 (increasing to 57 in 2028). Till then, it will grow, both from your and your employer's inputs and from potential growth within the stock market.

Pensions are invested into funds on your behalf and, the fund that it's invested into is usually just a default fund. It's important to contact your pension provider to discuss where your pension is being invested and ensure that it aligns with your financial beliefs and goals.

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Tax relief on pension contributions

Income Tax

You don't have to pay income tax on funds that you put into your pension. This means that while you would usually pay £20 in income tax for every £100 earned (for income earned within the basic rate tax bracket), and receive £80 in your pay to spend or save, in a pension you can save the whole £100. This tax relief happens automatically. For income earned in the high rate (40% tax) bracket or higher, the tax relief gets up to at least 40%. In some cases, it can be as much as 75% (if you have three kids and earn between £50,000 and £60,000).

In many cases, this added tax relief is not automatic and needs to be claimed. If you are a high-rate taxpayer and this is new news to you, go to the HMRC guidance page and claim your tax relief check.

There is an annual limit of £40,000 for gross pension contributions. Both contributions made by you and your employer count towards this limit. It is possible to utilise unused yearly permits for the last 3 tax years. If you contribute over this amount, tax may be charged on your pension fund.

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National Insurance and Salary Sacrifice

Some employers will also allow you to pay into your pension using a pay sacrifice setup. This means that instead of earning £100 and holding it in the pension, they reduce your pay by £100 and raise their input to your pension by £100. This saves you another tax – National Insurance, for most people, this is charged at 12%. Your employer will also save on their national insurance inputs, and some employers will even pay some or all of that saving into your pension too.