Workplace Pensions – Are you missing out on free cash?

Updated: Aug 26, 2019

Hopefully by now you will have read my articles about the State Pension and any previous workplace or personal pensions you may have had in the past, with a view to understanding your likely pension position when you retire.


For anyone who is employed and earning over £10,000 pa you will have been auto enrolled into your companies work place pension and are likely to be paying 4% of your qualifying earnings into the scheme, topped up by 1% tax relief effectively ensuring your contribution is 5%. In addition, you may be aware that your employer is also making a contribution on your behalf, normally a minimum of 3%, which is effectively a pay rise (albeit with the extra money being paid into your pension rather than in your pay packet) making a total pension contribution of at least 8%. Just to highlight this here is a typical example:


Fred’s qualifying earnings for pension purposes are £20,000 p.a and he is currently contributing 4% into his workplace pension scheme. Fred is a basic rate taxpayer therefore his monthly contribution is £66.66 but, with the additional 1% tax relief of £16.67, his total contribution is £83.33 per month. In addition, his employer pays 3% (there is no tax relief on the employer contribution), so this equates to an additional £50 per month being paid into Fred’s pension. Therefore £133.33 per month is being paid into Fred’s pension which is £1,600 per year but it is effectively only costing Fred £800 each year – in other words Fred is getting £800 free cash each year (paid into his pension pot).  


From my experience, most people tend to pay the minimum into the scheme but many employer schemes (especially medium / large companies) will also ‘match’ any additional employee contributions, up to certain levels. This, over time, could make a substantial difference to your pension pot when you retire.


My suggested steps to understand your options are:

  • Speak with your pensions / HR team to check what your current contribution levels are into your scheme. You might already have a scheme booklet which clarifies this

  • Understand how much your employer is also contributing. Currently, most employees need to be enrolled in a workplace pension where 8% of the employees qualifying earnings must be paid into a pension with a minimum of 3% being provided by the employer.

  • Matched contributions – this is a general term for when an employee elects to pay an additional pension contribution of say 2%, the employer will also pay a matched contribution, effectively doubling the employee’s contribution. If your employer offers this then I would seriously think about this as, over time this could have a very positive impact on your overall pension pot.

  • Further information and some useful calculators can be found at The Money Advice Service


PAD19– Pensions Awareness Day - From the 9–15th September the Pensions Awareness tour bus will be visiting around 9 locations around the UK offering free consultations / help on all things ‘Pensions’. Venues will be announced soon, so might be worth checking out the PAD website / follow on Twitter  and if you can make it in person it might be well worth a visit.


Pensions:

  • Some people think about it

  • Some people talk about it

  • Some people do something about it


Catch up soon and don’t forget to subscribe here


Mark



#pensions #earlyretirement #retirementguide #pensiondrawdown

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All articles in this site are the authors personal views and should not be viewed in any way as financial advice 

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