Workplace pensions are a useful tool for saving for the future. Saving directly into a pension from your salary alongside your employer can be an effective and tax-efficient way to build a retirement savings pot.
But do you know the answer to these important questions about your workplace pension? Read on to see if your knowledge is flawless or whether there are some questions you need to ask your employer.
1. How much goes into my workplace pension?
Under current rules as of October 2021, workers must see 8% of their salary paid into their workplace pension. This 8% is generally made up of three elements: employer contributions, your salary contributions, and tax relief.
Employer contributions
Your employer must contribute a minimum of 3% of your salary into your pension, but this is not a maximum threshold. In fact, some employers choose to pay more as an incentive to attract workers.
There are also tax advantages for employers to pay more into employees’ pension funds. You should check with your employer if they’d be willing to match or even “double match” your pension contributions.
Your contributions
You must contribute at least 5% of your salary into your pension. This money is taken directly from your pay each month.
You can voluntarily make extra contributions into your pot. As mentioned above, some employers may choose to match additional contributions, although they aren’t obliged to do so.
Tax relief
You’ll then receive tax relief on any contributions you make into your pot.
Tax relief removes the Income Tax that you would have paid on your salary and adds it into your pension pot at your marginal rate of Income Tax.
In real terms, this means that for a basic-rate taxpayer, a £100 contribution into your pension only costs £80.
For higher- and additional-rate taxpayers, a £100 contribution costs £60 and £55 respectively.
Tax relief makes up the final 1% of the compulsory 8%, but you may receive more than the basic 20% depending on your marginal rate of Income Tax.
It’s important to note that there is a threshold for how much of your contributions you can receive tax relief on. This is called the “Annual Allowance”.
In the 2021/22 tax year, the Annual Allowance is £40,000 or up to 100% of your salary, whichever is lower. Your Annual Allowance may be different if you make use of carry forward or if you are a business owner or director.
You should also check whether your tax relief is calculated from your “net pay” (before tax) or whether it’s “relief at source” (after tax). This can have implications for higher earners, as you may have to claim additional tax relief above the basic rate through your tax return.
This tax relief is typically applied through an adjustment to your tax band.
2. Will the tapered Annual Allowance impact me?
If you have a particularly high salary, you may need to watch out for the Tapered Annual Allowance. This reduces the amount you can pay into your pension while still receiving tax relief.
If you have an “adjusted income” (your salary including pension contributions) of £240,000 as well as a “threshold income” (your salary excluding pension contributions) of £200,000 or more, your Annual Allowance will be reduced by £1 for every £2 that you exceed the threshold. This reduction is down to a minimum of £4,000.
This means that if you have a salary of £312,000 or more, your Annual Allowance would be reduced to just £4,000.
3. Does my employer offer salary sacrifice?
Using salary sacrifice means reducing your salary in return for greater pension contributions from your employer. This can give your pot a boost, particularly if you’re getting close to retiring and no longer need the whole of your salary for income.
Salary sacrifice can also have National Insurance (NI) benefits. As pension contributions paid through salary sacrifice do not form part of your pay packet, they are typically free from NI charges. This could be particularly beneficial in light of the announcement of a forthcoming rise in the rates of NI.
This benefits both you and your employer. You may even find that your employer will pay the amount it has saved in NI contributions into your pension pot as part of the benefit.
Bear in mind that doing this could have a wider impact on your financial health. For example, your mortgage eligibility may be partially calculated from your annual salary. So, if you choose salary sacrifice and reduce your annual earnings, it may impact the amount you can borrow.
This could also affect any protection policies you have. For example, if you have an income protection policy, your insurer will work out how much you’re owed from your gross salary and will not include any amount that you sacrifice.
This could mean you receive less from your protection cover if you ever had to rely on it.
4. What type of pension scheme does my employer offer?
Your employer will offer one of two types of pension scheme: defined contribution (DC) or defined benefit (DB).
DC pensions mean the amount you receive at retirement is based on how much you put in and the subsequent investment growth, the latter of which is not guaranteed.
DB pensions, also known as “final salary” pensions, pay a guaranteed income based on criteria such as your annual earnings and how long you’ve been at the company.
Most pensions are now DC. Check with your employer to see which kind they offer.
5. Can I switch to a sustainable investment fund?
Some pension funds allow you to choose an ethical fund that exclusively invests in companies with strong ethical standards.
For example, Nest, the UK’s largest pension provider with more than nine million members, allows you to switch to its Ethical Investment Fund, investing in companies that seek to have a positive environmental and social impact on the planet.
According to Money Marketing, this can be the most effective way to reduce your carbon footprint. And in fact, according to The Guardian, ethical investments have outperformed traditional options over the past 10 years.
Ask your employer or workplace pension manager whether you can switch to a sustainable fund.
6. Can I opt out of my workplace pension scheme?
While employers must offer a workplace pension scheme, you’re entitled to opt out and take your contributions as salary instead.
If you opt out within one month of being enrolled, your contributions will be returned to you. Opting out after this point will mean you won’t be able to access those funds until retirement.
However, bear in mind that by opting out, you won’t receive employer contributions, tax relief, or the potential investment returns that your workplace pension offers.
7. Can I choose my own pension for employer contributions?
Outside of the scheme that your employer uses, you may want to check whether your employer will allow you to choose your own pension scheme.
For example, you may want to build your retirement savings using a self-invested personal pension (SIPP) where you can choose your own investments.
Check with your employer whether they’ll allow you to receive their contributions into a pot of your choice.
Work with us
If you’d like to find out more about how to make the most of your workplace pension, please get in touch with us at Bowmore Financial Planning.
Email enquiries@bowmorefp.com or call 01275 462 469 to speak to one of our experienced advisers.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator.
Bowmore Financial Planning Ltd is authorised and regulated by the FCA.
