Our Head of Pensions and Savings reacts to interactive investor figures revealing a difference of £278,000 in retirement pots between the least and most generous schemes.
It’s ‘Pension Awareness Day 2021’ tomorrow, and with data from the Office for National Statistics this morning revealing a buoyant post-pandemic jobs market and recruiters reporting on a ‘great resignation’, Becky O’Connor, Head of Pensions and Savings, interactive investor, gives her top tips on what to ask a new employer about the workplace pension scheme, as a potential new joiner:
“Think of a pension as an effective, deferred pay rise and you will soon start to pay more attention to the percentages on offer from a potential new employer. The minimum contribution may be 8%, but some employers are far more generous, with total contributions from some workplaces equal to more than 20% of salary.
“Over a lifetime of earnings, this extra can mean the difference between a reasonably basic retirement and a comfortable one when you give up work. According to interactive investor’s calculations, someone starting working life on a typical graduate salary, receiving pay rises of 1% a year, 2.5% above RPI investment growth and with a pension contribution of 8% would retire with a pot worth £186,000 at age 68. This rises to £464,000 with a total contribution of 20% a year throughout working life – a £278,000 difference.
- If you are lucky enough to be choosing between jobs with similar salaries, then the generosity of a pension may swing it for you. The minimum auto-enrolment contribution including employee and employer contributions, as well as tax relief, is 8% but employers hoping to attract talent often offer more and some schemes offer maximum employee/ employer/ tax relief in excess of 20%. However, you will usually need to contribute more of your salary in order to get the maximum from an employer. Ask the recruiter or HR team at your prospective employer what the maximum contribution allowed is from you and up to what level will the employer match or ‘double match’ your contributions. An example of matching is you contribute 5% and your employer contributes 5%. Double matching would mean you put in 5% and your employer contributes 10%. It’s worth remembering that with all pensions, can also increase your own contributions up to the annual allowance of £40,000 or your maximum earnings, if lower, even if the employer doesn’t continue to match them.
- Ask if your workplace pension scheme offers a sustainable fund option either by default or one that you can choose yourself. The way pensions are invested by big workplace schemes can have an impact on the planet, as they may be invested in fossil fuels, or more beneficially, renewable energy. If this is important to you, ask whether a green option is available before signing up.
- Ask what type of pension scheme your potential new workplace offers. The chances are it is defined contribution (so you know what you will put in, but what you get out will depend on investment performance), but if a public sector role, it could be defined benefit, in which case when you retire you will receive an income based on your salary when you were working. The latter are less common now but often more generous overall.
- Check what tax relief you will receive on contributions. Basic rate taxpayers will receive 20% tax relief. If you will be earning more than the higher rate tax threshold of £50,270, you can receive 40% relief on contributions and if you earn more than £150,000, you are entitled to 45% tax relief on contributions.
- Similarly, how tax relief is applied to your work pension can make a difference to your take-home pay and how much ends up in your retirement pot. Whether the scheme takes ‘relief at source’ (after tax) or is ‘net pay’ (before tax) can be particularly relevant to lower earners as with net pay schemes, people earning below the £12,570 personal allowance threshold won’t get tax relief, because they don’t pay income tax. With ‘relief at source’, they will still receive tax relief. It can also be relevant to higher earners, as with relief at source, higher earners may need to claim tax relief above the basic rate through their tax return – a bit of extra hassle.
- Many employers now offer salary sacrifice, saving both the employee and employer on their National Insurance bill, which may feel like a more pressing concern after the introduction of the new Health and Social Care levy from next April. It’s where you agree to give up some salary in return for a higher pension contribution. This can have other implications, for example, potentially reducing your salary for mortgage affordability calculations, so it’s important to understand this before agreeing to give up salary in this way.
- Would your employer agree to pay your pension contributions into a Self-Invested Personal Pension (SIPP), so that you can choose how to invest your own pension? Some employers do offer this and it can be a good option if you want full choice and control over where your pension is invested.
- Will you receive a bonus and could you afford to invest this into a pension? ‘Bonus exchange’, where your bonus is paid directly into your pension, can result in a significantly reduced income tax and NI bill. If doing so would take you over your annual allowance of £40,000 (or maximum earnings if lower) in a tax year, consider using ‘carry forward’, which allows you to use up unused allowance from the previous three tax years.
- Be mindful of the tapered annual allowance for pensions if you are going to be earning more than £200,000, the ‘threshold income’ at which your annual allowance for contributions, usually £40,000 or up to a maximum of earnings if lower, begins to reduce.
- For self-employed workers, when choosing how much to contribute, use what you would be paying in if employed as a benchmark, as you are your own employer, so the amount to aim for should equal what your total contribution would be from employee and employer if you were employed. Interactive investor has suggested that the 8% minimum may not be enough for an adequate retirement income, but 12% of earnings may be a better minimum contribution target, given global stock market returns may be ‘lower for longer’ over the coming decades (see ‘Is 12% the new 8%?’)
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