Most of us aren’t saving enough for our retirement, so what are the options if you want to pay more into your company or personal pension scheme?
Allocating a bit extra from your paypacket into your pension could reap major financial rewards when you come to retire, so it’s well worth considering if you find yourself with a bit of spare money at the end of the month.
Here, we look at some of the best ways to top up your pension, as well as how you might be able to give your State Pension a boost too.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation* with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
Paying extra into your company pension
How much are you paying into your company pension scheme? Do you even know?
Many people who join their employer’s pension scheme breathe a huge sigh of relief once they’ve done so – often because they think it means they’ll never have to worry about pensions again. But, unfortunately, it’s not necessarily that simple. Joining your employer’s pension scheme is definitely a great step in the right direction, and under auto-enrolment rules most people will be signed up automatically – but you may need to top up your pension if you started saving late, or the pension scheme isn’t particularly generous.
With some company pension schemes, your employer will make contributions if you want to pay extra money into your pension. And even if they don’t, it may still be worth doing.
If you’re planning a pension payday top up, your first step should be to find out how much you’re currently saving and what that will buy you in retirement. You should receive an annual statement of how much your pension fund is currently worth, how much it could be worth when you retire and how much it could produce when you convert it into an annual income.
If you’re in a money purchase or defined contribution pension, the amount you’ll receive at retirement depends on a number of factors, including how well the investments perform between now and retirement. If, however, you belong to a defined benefit scheme, it’ll pay out a guaranteed income when you retire. These pensions are often known as ‘final salary’ schemes. Learn more in our article What is a defined benefit pension?
You should then look at how you can top up your company pension. There are likely to be several choices:
- AVC or additional voluntary contributions: AVCs are pension top ups offered by your employer. The amount you receive at retirement will depend on how well the AVC fund has performed. There are pros and cons to using your employer’s AVC funds. The main advantage is that your employer may subsidise them in some way, either by making contributions on your behalf or by paying some or all of the charges. The disadvantage of AVCs is that your choice of investment funds may be limited. Some AVC schemes have only two or three funds and they tend to be quite conservative, which may not suit everyone. You also can’t assume they’ll be good funds just because they’re offered by your employer’s scheme. You can learn more about AVC pensions in our article What is an AVC pension? and about the importance of knowing which funds your retirement savings are going into in our guide Where is my pension invested?
- FSAVC or free-standing additional voluntary contributions: If your employer doesn’t offer an AVC pension, you can still pay into one separately with a pension provider of your choice (known as a free-standing additional voluntary contribution, or FSAVC). This effectively means that you have a pension fund that’s separate from your workplace pension that you can pay as much or as little of your salary into as you like (within certain limits).
- Added years. If you belong to a final salary scheme, you may be able to buy added years membership of the pension. This is a great option because it means that, when you retire, you’ll be treated as though you’ve been in the pension scheme for longer than your working years. By buying added years you get access to all the ‘bells and whistles’ that come with your company pension scheme.
How to get the most from topping up
One of the biggest benefits of topping up your pension that can be overlooked is that any additional contributions will benefit from tax relief. This applies whether you’re contributing to a workplace or a personal pension.
If you’re a basic rate taxpayer, you’ll automatically get tax relief on pension contributions at the basic rate of tax which is 20%. That means if you wanted to add £100 to your pension on payday, you’d only need to contribute £80, as the government would add the £20 it took in income tax.
If you’re a higher or additional rate taxpayer who pays income tax at a rate of 40% or 45%, you can claim even more pension tax relief back, so paying £100 into your pension will cost you just £60 as a higher rate taxpayer, or £55 if you’re an additional rate taxpayer. You’ll usually get 20% of this back automatically and then will have to claim the remaining 20% or 25% through your tax return or by calling HMRC. Find out more in our articles How pension tax relief works and Are you missing out on thousands in pension tax relief?
Bear in mind that there are some circumstances when it may not be in your best interests to pay extra money into your employer’s pension scheme, so it’s worth seeking advice if you’re unsure. For example, although there is a safety net (called the Pension Protection Fund) for company final salary pension schemes, there are limits on how much compensation you’d receive if your employer went bust.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation* with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
Topping up your State Pension
It’s also possible to top up your State Pension by buying missing years in your National Insurance record. This will increase the amount of State Pension you receive in retirement.
In order to buy extra years, you’ll need to pay what are known as ‘voluntary class 3 NI contributions’. The rate is currently £907.40 for a full year (£17.45 per week), which will boost your State Pension by around £302 a year (£5.82 a week). You can buy extra years online through the State Pension forecast service. Visit GOV.UK to find out more.
If you’re a man born after 5 April 1951 or a woman born after 5 April 1953, you have until the 5th April 2025 to pay voluntary contributions to make up for gaps in your NI record between 2006 and 2016. After this date, the number of years you can buy falls to the last six years, so if you have missing years from decades ago you won’t be able to make these up. Learn more in our article Is it worth paying to top up your State Pension?
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