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.
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