Retirement can seem far off when you are in the middle of your IT career but making the most of your company pension scheme now could enable you to have a better lifestyle in retirement. It could even allow you to take early retirement.
To help you do this, here are five things that will help you to make the most of your company pension.
Start early to benefit from compound interest
The first rule of saving for retirement is start as early as you possibly can. This is because the longer your savings are invested for, the greater returns you will typically receive due to the power of compounding.
If you make returns on the amount you have invested, you will subsequently receive “returns on returns”. Over time, those returns mount, growing your pension pot even further than your individual contributions do.
You might enjoy our article ‘The power of compounding and how it helps grow your wealth’ if you would like to learn more about compound interest and its benefits.
Employer contributions boost the amount paid into your pot each month
In a company pension scheme, you will normally contribute a certain percentage of your pre-tax salary every month. Your employer will also be required to contribute at least 3% of your salary – although many IT firms pay more than this.
This is essentially free additional money from your employer that is invested for your future.
If you choose to make additional contributions above the minimum requirement, some employers will match these additional contributions up to a certain point. Rules differ between employers though, so check what you are entitled to.
If you can afford additional contributions and your employer agrees to match them, it can be beneficial to make the most of this. Employer-matched contributions are the easiest and cheapest way to boost what goes into your pension pot each month.
Your pension contributions may be eligible for tax relief
If you are below the age of 75, you may receive tax relief on your pension contributions up to the Annual Allowance of £40,000 or the total amount of your salary, whichever is lower. High earners with a total income in excess of £200,000 should check with an adviser before making contributions as you may be subject to a reduction of the Annual Allowance.
How to claim tax relief on your pension contributions
If you contribute to your pension using the relief at source method, the government will add back Income Tax paid at the basic 20% rate to your contributions, giving your pension fund a further boost. Any higher or additional rate relief will need to be reclaimed through your tax return or by contacting HMRC directly and will be paid to you through an adjustment in your tax code.
This additional relief can provide a substantial boost to your savings, so it is important that you remember to claim it every year.
If you pay your pension contributions through salary sacrifice, even if you’re an additional-rate taxpayer, you get full tax relief without having to claim it through self-assessment. This also means that your pension pot benefits without you having to do extra admin.
Simply by paying into your pension every month, you can ensure even more of your money goes towards saving for your future rather than to HMRC. Just like your employer-matched contributions, this is additional free money being deposited into your pension pot.
Invest your pension in the right fund for you
Just like any other type of investment, you have a choice over where your pension is invested. You can usually choose from different portfolios, which contain funds with different risk profiles. There is often also an ethical/ESG option.
This means that, to get the very best from your pension, it is important to be sure that your money is invested in a portfolio that best suits your needs. This may change throughout your career, since different risk profiles are more appropriate based on how close you are to retiring, for example.
If this sounds daunting, remember that your financial planner can help you to navigate this process.
Remember to trace any forgotten pensions
Now that the workplace pension is a legal requirement, you will usually be enrolled into a new pension plan with each new employer you work with. This means that if you have worked for a few different companies during your career, you may have accumulated several pension plans.
Keeping track of these and finding any “lost” pots can give your retirement savings a real boost.
According to the Telegraph there are an estimated 1.6 million lost pension pots in the UK, totalling around £37 billion. This means the average lost pension pot is worth £23,000. By neglecting your earlier pension pots, you could be missing out on thousands of pounds for your retirement.
Our article ‘How to find your forgotten pensions’ provides further information about pension tracing and what to do with any lost pensions you may have.
Get in touch
If you would like our help understanding your pension, choosing how to invest it, and how to make the most from it, email enquiries@bowmorefp.com or call us on 01275 462 469.
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.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
Bowmore Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.
