What is a private pension scheme?
A private pension (also known as a 'personal pension') is set up by the worker, while a workplace pension is set up by the employer.
Private pensions are a personal pension that does not affect auto-enrolment or workplace pension contributions.
A personal pension is a tax-efficient way of adding to a pension pot:
When someone is self-employed
In addition to a workplace pension
Where someone is not eligible to be in a workplace pension
How do private pensions co-exist with workplace pensions?
Under the Pensions Act 2008, every eligible worker must be auto-enrolled into a qualifying workplace pension scheme unless they choose to opt out. This requirement ensures that workers are saving adequately for retirement in a regulated, employer-supported scheme.
Even if a worker has a private pension, it may not meet the criteria of a qualifying scheme. This is because workplace pensions are designed to meet specific contributions and standards set by The Pensions Regulator. Automatically enrolling eligible workers into a qualifying scheme ensures compliance with these standards, offering them additional retirement savings protection.
Workers with private pensions can still remain in the workplace pension scheme or opt out if they prefer to continue contributing solely to their private pension.
Tax rules
Private pensions benefit from tax relief similarly to workplace pensions. The pension provider claims this tax relief on behalf of the worker, rather than it being managed within PayFit.
Paying the provider
There are two ways that contributions can be paid to the pension provider:
Employer makes the payment: The employer deducts contributions from the worker's net pay and pays these directly to the pension provider. This can include:
Worker-only contributions
Worker and employer contributions
Worker makes the payment: The worker makes their own contributions to the pension provider. If the employer also contributes to the scheme, they make a net payment to the worker, who includes this in their payment to the provider. This option carries higher risk as the employer can't verify if the payment was made to the pension provider.
Note: PayFit can't make direct submissions to private pension providers or generate submission files for private pensions. However, the contribution amount will appear in the 'Payments to Make' section for your reference.
Adding a private pension scheme in PayFit
Note: PayFit allows up to five pension schemes; this includes any private schemes.
From the left, choose Pensions, then Private schemes.
Click Add private pension schemes.
Toggle Enable private schemes, then click Save.
To add the scheme to a worker, next to the relevant worker, click Edit, complete the relevant fields then click Save.
The pension contribution details now appear on the worker's payslip.
FAQs
If a worker only wants to be in a private pension, do I still need to enrol them into the company auto-enrolment scheme?
Yes, the worker must be auto-enrolled into the workplace pension scheme if they are eligible. They can then opt out after the first month if they wish, as with any other pension.
If a worker is contributing to a private pension scheme, is the company required to contribute too?
No, unless it is explicitly stated in their contract. If the worker opts out of the workplace pension, the employer is not legally obligated to contribute to the private pension.