Saving into a workplace pension into which both you and your employer contribute is a great way to prepare for retirement, but it’s worth checking that you’re making the most of your particular employer’s scheme.
This includes maximising the amount of employer contributions that you can receive, and ensuring your pension is invested in the most suitable fund or funds for your life stage and retirement goals.
Becky O’Connor, director of public affairs at PensionBee, said: “When choosing a future employer there’s a lot at stake and your priorities will no doubt be focused around job satisfaction, career progression and, of course, salary.
“However, the relative generosity of a pension can be absolutely crucial to your overall financial circumstances in life – in fact a good pension, for example, one that pays 16% of your salary rather than 8%, can be better for your finances throughout your lifetime than a 1% higher starting salary. Yet pensions are an often overlooked part of the overall employment package.”
Here, we look at the questions you may want to ask about your workplace pension, so that you can make the most of its benefits and give yourself the greatest chance of a comfortable retirement.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with 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 1,000 reviews on VouchedFor, the review site for financial advisors.
Contents
- Where is my workplace pension invested?
- How much will your employer contribute to your workplace pension scheme?
- Is your workplace pension a defined contribution or defined benefit scheme?
- Is your workplace pension salary sacrifice, net pay or relief at source?
- When can you access your workplace pension?
- Where to seek further help
1. Where is my workplace pension invested?
Many pension savers find that their contributions into their workplace pension scheme are automatically invested into a standard ‘default fund’, unless they’ve chosen a different option. This will usually invest in a mixture of assets, with the investment approach changing as you approach retirement. For example, you may find you’re mainly invested primarily in shares if you’re a decade or more away from retirement, but a greater proportion of your pot will shift into bonds as you approach retirement age to reduce your investment risk. Find out more in our article Where is my pension invested?
However, your workplace default fund may not be the best option for you, depending on your attitude to risk, age, and retirement plans. You may be comfortable taking more risk, particularly if you’re some way off dipping into your pension. Besides, many people plan to stay invested into retirement in a drawdown plan so are willing to continue accepting a level of risk in the hope they’ll end up with a higher retirement income.
However, if you’re planning to buy an annuity in the short term, you may prefer to remain in a default fund, or to choose a lower risk option for peace of mind. Read more in our article Your pension options at retirement.
2. How much will your employer contribute to your workplace pension scheme?
Your employer’s contributions into your workplace pension can make a substantial difference to your retirement pot over time. Many people think of this money as a sort of delayed payrise that they’ll receive in retirement.
Under pension auto-enrolment rules, the minimum contribution that must be made into your pension is 8% of your ‘qualifying earnings’. Of that 8%, your employer can’t contribute less than 3%, but they can pay as much of the 8% as they want. The government is currently under pressure to increase the minimum contribution under auto-enrolment to 12% to boost people’s retirement pots. Read more in our article How does pension auto-enrolment work?
O’Connor said: “The amount employers pay in can vary from 3% to well into double figures, which can make thousands of pounds difference to you when you retire. ‘Double matching’, when you increase what you put in and the employer doubles up on your contributions, up to a maximum, is a very effective way of ramping up the amount going in.”
It’s worth noting however that auto-enrolment contributions currently only have to be paid on ‘qualifying earnings’ of between £6,240 and £50,270, although this is changing so that the lower qualifying earnings threshold will be scrapped. You can find out more about these changes in our guide Pension boost for millions of part-time workers. If you’re unsure how much you’re paying into your pot, speak to your workplace pension provider to understand how your particular scheme works.
Some employers will pay in more than the minimum contribution, and you can usually pay in extra if you want to. You are also able to make additional one off voluntary contributions into a workplace pension at any time and still receive any tax relief you qualify for. If you’re not sure how much you should be putting away for the future, read our article How much should I save for retirement?
The impact of pension contributions on your retirement pot
| Starting salary | Total salary from 22 to 65 | Pension pot at 65 at 8% contributions | Total lifetime salary and pension pot at 8% | Pension pot at 65 at 16% contributions | Total lifetime salary and pension pot at 16% |
| £30,000 | £1,601,233 | £199,905 | £1,801,138 | £399,809 | £2,001,042 |
| £33,000 | £1,762,127 | £219,895 | £1,982,022 | £439,790 | £2,201,917 |
Source: PensionBee. Assumes 1% a year salary increases, 2.5% investment growth, pension charge of 0.65%.
The maximum you can contribute to a pension each year and benefit from tax relief is £60,000 or 100% of your earnings, whichever is lower. This is known as your Annual Allowance If you earn more than £200,000, the limit is lower. If you’ve previously accessed a pension flexibly and taken any income from that, as opposed to just your tax free cash, then your allowance falls from £60,000 to £10,000 a year, and becomes known as the Money Purchase Annual Allowance (MPAA). Find out more about pension allowances in our guide How do pension allowances work?
3. Is your workplace pension a defined contribution or defined benefit scheme?
Chances are, your workplace pension scheme is a defined contribution scheme, which is the most common type of pension. Defined benefit pensions, or final salary schemes, are a dying breed and mainly found in the public sector. They are increasingly rare because they are so expensive for employers to run. If you do have access to a defined benefit scheme, you’re in luck, as these provide a gold-plated retirement income. You’ll pay some sort of contribution from your salary, but you’re not responsible for your retirement income. It’s your employer who takes responsibility, and the contributions added by the employer are usually pretty high.
You’ll usually receive a generous, guaranteed income for life from a defined benefit pension, which is likely to be more than you could get from a defined contribution scheme. While defined contribution schemes are flexible, as you can often do as you want with the money from age 55, they are unlikely to provide as much income as a public sector pension. The amount you receive from a defined benefit scheme is based on your salary during your employment (either a career average or final salary) and the number of years you’ve belonged to the scheme.
You can read more about defined benefit pension schemes in our guides What is a defined benefit pension? and How do public sector pensions work?
4. Is your workplace pension salary sacrifice, net pay or relief at source?
If you’re paying contributions into your workplace pension which are ‘net pay’, this means that the money you pay into your pension is taken from your salary before tax is deducted. This way of making contributions leaves you with a lower tax bill on your salary. By contrast, contributions that are ‘relief at source’ are taken from your pay after tax. You’ll then receive 20% basic rate tax relief from your pension provider, and if you’re a higher rate taxpayer, you can claim the additional relief through your tax return. If you’re unsure how your particular scheme works, speak to your employer.
A salary sacrifice arrangement is when you and your employer agree to reduce your pay in exchange for a particular benefit, often childcare, pension contributions or a company car. Salary sacrifice can be particularly financially attractive as you will not be charged tax or National Insurance contributions on the amount deducted, only on the actual pay you receive. You can find out more in our guide What is salary sacrifice?
5. When can you access your workplace pension?
If you’re paying into a workplace defined contribution pension, you might be able to access your savings pot from the age of 55, rising to 57 in 2028. However, the majority of employers have a ‘normal retirement age’ at which you start taking benefits, which may be 60 or 65.
You can use your retirement savings however you want, and you’re able to withdraw 25% of your pension as a tax-free lump sum. However, it’s important to consider the impact of taking a lump sum out of your pension. You can find out more in our article Should I take my tax-free lump sum at age 55?
If you’re paying into a defined benefit pension, the age at which you can access your money again depends on your particular scheme’s rules. The majority of defined benefit pensions have a retirement age of 65, but you can check when you will get your pension with your pension provider. Some older sections of public sector pension schemes have a retirement age of 60.
If you suffer ill health or a disability that’s likely to reduce your life expectancy, you may be able to access your defined contribution pension before the age of 55. However, taking your pension early could reduce the amount you receive in retirement. Read more in our article Can I retire early because of an illness or disability? Alternatively, you might want to delay your pension to potentially increase the amount you receive beyond 55 or your particular scheme’s retirement age.
Where to seek further help
The Government’s Pension Wise service, run by the Pensions Advisory Service and Citizens Advice, provides people aged 50 and above with free guidance on their pension choices at retirement.However, if you are seeking tailored advice that’s specific to your situation, you may want to seek professional financial advice.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with 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 1,000 reviews on VouchedFor, the review site for financial advisors.
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