Setting up a pension plan

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We’re answering a question many people may find themselves asking at some point – “How do you set up a pension plan?” This could help you whether you’re looking to start saving for your future or want a better understanding of the pension plans you already have.

Types of pension plans

Let’s start by looking at some types of pension plans. Pension plans are arranged within pension ‘schemes’.

Firstly, there are personal pension plans, which you usually set up yourself by getting in touch with a pension provider. Personal pension plans are arranged within ‘defined contribution’ (also known as ‘money purchase’) schemes. Here’s how defined contribution schemes work: you pay into your plan, then this money’s invested. The amount you’ll get back depends on how much has been paid in, how well your investments have performed, and any fees or charges that have been taken (to cover admin costs, for example).

Next up – workplace pension plans. Your employer will normally set one of these up for you. Most workplace pension schemes are also defined contribution schemes, so they can work in the way we’ve just described.

Let’s go over some of the benefits of these personal and workplace pension plans. You can usually get tax benefits, which basically means the government gives your personal or workplace plan a financial boost. Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.

Another benefit is that your money’s invested, so your plan could really grow in value over time. But the value of your investments can go down as well as up and you could get back less than was paid in.

It’s worth noting that some workplace pension schemes are ‘defined benefit’ (sometimes known as ‘final salary’) schemes. You don’t choose whether your workplace pension scheme is a defined benefit or defined contribution scheme – it depends on your employer.

With defined benefit schemes, the amount of money you get back will be based on your average salary over your career, or your salary when you retire or leave the scheme. It can also depend on how long you’ve been part of the scheme. Your employer pays into your plan, and you might be able to as well. One of the biggest plus-points of defined benefit schemes is that you’re guaranteed an income for the rest of your life once you reach a certain age.

Setting up a workplace pension plan

If you’re in employment, you’re likely to be enrolled into a workplace pension scheme without even having to ask. This process is known as auto-enrolment. You’ll only be eligible for this if:

• You’re classed as a worker
• You work in the UK
• You’re over the age of 22 but under State Pension age (which is currently 66, but rising to 67 by 2028)
• You earn £10,000 or more per year

As long as you meet these criteria, you probably won’t have much involvement in setting up your workplace pension plan. Your employer will just go ahead and arrange it for you. They’ll decide who your pension provider is. They’ll probably select your investment options too, although you’ll usually be able to change these if you want. 

If you don’t want to be part of the workplace pension scheme, you’ll need to opt out.

You’ll normally start paying into your plan from your salary automatically. Your minimum payment is usually 5% of your ‘qualifying earnings’. This is anything you earn in a year between a lower limit of £6,240 and an upper limit of £50,270.

Let’s say you earn £30,000 annually. Your qualifying earnings would be £23,760 (which is £30,000 minus £6,240). So you’d pay a minimum of 5% of £23,760 into your pension plan.

Depending on your employer, the percentage might apply to your total earnings – so do check.

Your employer usually needs to pay into your workplace pension plan too. Their minimum payment is normally 3% of your qualifying earnings. This means a minimum total of 8% needs to be paid in by you and your employer. 

If you earn between £6,240 and £10,000 annually, you won’t be eligible for auto-enrolment. But your employer would need to enrol you in a workplace pension scheme if you asked them to, and they’d need to start paying into your plan.

If you’re younger than 22 but over 16, you could also ask your employer to set up a plan and pay into it. The same applies if you’re between State Pension age and 74.

And if you earn less than £6,240, your employer will normally open a plan for you if you ask them. They won’t be required to pay in, though.

Setting up a personal pension plan

A personal pension plan is usually something you set up yourself, if you decide you want one. They can be a good option for people who aren’t eligible to join a workplace pension scheme, like those who are self-employed or who aren’t in work. Even if you have a workplace pension plan, you could still have a personal one too.

The setting-up process will likely involve shopping around for providers and plans. You might choose to use comparison sites.

When you find a plan that’s suitable for you, you may need to pay in a lump sum or set up regular payments to open it. The provider will normally specify the minimum amount for payments. Many providers let you set up pension plans online.

If you’re feeling unsure about setting up a plan, you might decide to seek financial advice. If you don’t have a financial adviser, you could find one at unbiased.co.uk.

When setting up your own, you might come across different types of personal pension plan:

• Personal pension plans – ‘Personal pension plan’ can be used as an umbrella term (and we’ve used it this way throughout this article so far). But it can also refer to a specific kind of plan under this umbrella. These kinds of plans offer a selection of investment options (but likely have fewer options than something like a self-invested personal pension plan, which we’ll get onto in a moment). With personal pension plans, you can usually pick which funds you invest in, or your pension provider could make the choice for you. You can make regular payments and pay in lump sums.
• Stakeholder pension plans – These plans need to meet minimum standards set by the government. They have a limit on annual charges. They offer low minimum payments, which you can stop and start at any time. They normally have a fairly small range of investment options. If you don’t want to choose how to invest, your money will be put in a default investment fund.
• Self-invested pension plans (SIPPs) – These plans offer a wider range of investment options than other plans. You can choose and manage your investments yourself, although you might wish to do this with the help of a financial adviser. You can pay in lump sums and set up regular payments. 

What’s right for you could depend on things like your circumstances, how much you wish to pay in, and how much control you want over your investment options. For example, if you feel very confident when it comes to investing, you might prefer to set up a SIPP. Or if you want to save for retirement but don’t have a lot of money to spare, you might choose a stakeholder pension plan for its low minimum payments.

When should I set up a pension plan?

When it comes to setting up a pension plan – or having one set up for you – earlier is almost always better. After all, it gives you (and anyone else paying in, like an employer) the chance to build up your savings. The longer your money’s invested, the more opportunity it has to grow.

Again, remember that even if you’re under 22 you can still ask your employer to enrol you into a workplace pension scheme. 

If you’re thinking about saving for retirement and wondering how much money you might need, check out the Retirement Living Standards, published by the Pensions and Lifetime Savings Association. And if you already have a pension plan, you can use our pension calculator to check how much your plan might be worth in future.

The information here is based on our understanding in February 2023 and shouldn’t be taken as financial advice.

A pension is an investment and its value can go down as well as up and may be worth less than was paid in.

Standard Life accepts no responsibility for information in external websites. These are provided for general information.