How to top up your workplace pension
Your workplace pension is an incredibly convenient way to save for when you want to retire, and income tax relief and employer contributions will help you to build up your retirement pot.
Virtually everything is done for you. Your employer will have set up the scheme and is responsible for making sure that it complies with all of the relevant legislation. All you have to do is decide whether or not you want to be a member. You should be automatically enrolled, and you’ll have to opt out if you don’t want to be a member. Assuming you join the scheme, your employer will calculate your contributions, deduct it from your salary and pay them directly from your salary.
Tax relief on your workplace pension contributions
Don’t let the convenience of a workplace pension lull you into being too casual about it. You get tax relief from the government on the money that you pay into your workplace pension and if you really want to take advantage of the income tax relief available and build up as big a pot as possible, it’s worth thinking about contributing extra money where possible.
Your employer will pay in too
Your employer will have to contribute to your workplace pension, and from 6 April 2019 this has to be a minimum of the equivalent of 3% of your qualifying earnings. These employer contributions are one of the reasons why saving through a workplace pension scheme can be so effective.
Boosting contributions in line with your salary increases
Over the course of your career, it’s likely you’ll get an annual increase in salary. When you get a wage increase, the good news is that your contributions will automatically rise – this is because they’re generally a percentage of your salary. Making it easier to keep your contributions in line with your earnings.
But don’t forget that there are other times you can contribute, such as when you get a bonus or an unexpected lump sum, and putting at least some of this money into your pension plan can make a real difference over the course of a lifetime.
Paying bonuses towards your workplace pension
If you get an annual bonus, you can ask your employer to pay some or all of it into your workplace pension.
If the contribution is made through bonus sacrifice, there are benefits for both you and your employer. The contribution would attract income tax and national insurance relief and so if your gross bonus was £5,000 then that full amount would be credited to your plan. Nor would your employer pay national insurance on this money, and many employers will give you some or all of the saving they make. If you got the full saving on a £5,000 bonus, another £690 would go into your pension.
If you took the bonus as cash, you’d have to pay income tax and national insurance on the money, significantly reducing what ends up in your pocket. Therefore, if you can afford to put some or all of the money into your pension, it’s a tax-efficient way of boosting your workplace pension.
Let your workplace pension benefit from an unexpected windfall
You might at some stage in your life receive some inheritance money and your workplace pension can make a safe home for it and ensure it gets put to good use. As with any contribution, you’ll receive income tax relief, increasing the amount that is credited to your pot. You have to be able to support all pension contributions with earnings that are subject to UK tax to be able to get tax relief. If you receive an inheritance when you are not earning, you’ll only be able to get a limited tax relief.