We think workplace pensions are brilliant. Take a look at why and learn tried and tested steps to make yours even better.
Extra money from your employer
One of the reasons workplace pensions are great is your employer pays in as well as you. That’s extra money on top of your salary, just for being in the pension scheme.
The minimum amount your employer has to put in is equal to 3% of your salary between £6,420 and £50,000. You have to put in 5%. So the equivalent of 8% of your salary is going into your pension savings, but you’re only paying 5% of it.
It’s worth putting in more – especially with a match
8% still isn’t a lot, so it’s worth putting in more if you can. Even a small extra amount can add up over the years.
Some employers encourage you to put more in by offering to match your contributions. They’ll put in more if you put in more, up to a limit. For example, if your employer matches your contributions up to 6% and you put in 6%, that’s the equivalent of 12% of your salary going into your pension savings. And you’re only paying half of it.
Ask your employer if they do matching contributions.
Extra money from the Government
Even if your employer only pays the minimum, it’s worth putting more into your pension savings because you also get extra money from the Government. It’s called tax relief and it works like this.
- You don’t pay income tax on pension contributions. This is usually because they come out of your salary before the tax is worked out.
- Instead, the Government adds some of the money you would have paid in tax to your pension savings.
If you pay income tax at the basic rate of 20% and put £100 into your pension savings, the Government adds around another £25. So £125 actually goes into your pension savings.
If you pay tax at a higher rate, you get tax relief at the higher rate – though you may have to claim some of it back in your self-assessment tax return.
The tax relief ceiling is high
There’s a ceiling on pension tax relief called the annual allowance, but it’s £40,000 a year for most people. Thanks to the annual allowance, you could put up to the whole of your earnings in a tax year (April-April) into your pension savings and still get tax relief – as long as your contributions, and your employer’s contributions, total £40,000 or less.
If you’re a higher earner (around £200,000 a year or more) you may have a lower ‘tapered’ annual allowance, which can be as low as £4,000 a year.
Save with salary sacrifice
Salary sacrifice (also called salary exchange or Smart Pension) is a way to pay pension contributions while saving National Insurance.
- You agree to give up (sacrifice) part of your salary equal to your pension contributions.
- Your employer pays the contributions you would have paid into your pension savings, on top of their own contributions.
- Your employer pays your salary without the amount they’ve taken off for pension contributions.
- You pay less National Insurance on this lower salary.
In other words, you’re paying:
- the same pension contributions you would without salary sacrifice, but
- less National Insurance.
So your take-home pay is a little bit higher.
Employers also save National Insurance and some employers use those savings to top up their contributions to your pension. Ask your employer about salary sacrifice.
Investing your pension savings
Money in a pension is invested to help it grow, so you get more income when you retire. If you’ve never chosen anything else (or thought about it) you’re likely to be in your pension provider’s default investment option. This will have been designed by investment experts to be suitable for most people, and have low management charges.
Many pension schemes are moving into ‘greener’ investments – investing in renewable energy, for example. So your pension investments could be doing good as well as growing your money.
Ask your employer or pension provider how your pension savings are invested.
Remember your State Pension
Don’t forget your State Pension – this can be a big part of your retirement income. The amount you’ll get is based on the number of qualifying years you’ve paid National Insurance contributions, or received National Insurance credits (paid to carers and people on certain types of benefits). You need 35 qualifying years to get the full State Pension, which is currently around £9,600 a year. But you’ll get some State Pension as long as you have at least 10 qualifying years.
Get a State Pension forecast to find out how much your State Pension could be.
You can claim your State Pension from your State Pension age. Check your State Pension age.
Pay your pension some attention
The more attention you pay to your pension, the better you’ll understand it and the more you’re likely to get out of it when you retire. To get this Pension Awareness season off to a good start, check out your workplace pension. You’ll be glad you did.