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What should I know about my workplace pension scheme?
Your workplace pension is likely to provide a large proportion of your income in retirement. This is especially true since the introduction of auto-enrolment, which has seen a huge upsurge in engagement with pension savings. According to the Department for Work and Pensions, participation in the scheme has risen from 49% of UK employees during its first year, to 75% for the tax year 2019/20. While the government widely regards the scheme as a success, there are still improvements to be made. To better understand your workplace pension scheme and to stand the best chance of living your desired lifestyle in retirement, consider asking your employer these seven important questions.
1. Do I have a defined contribution (DC) scheme?
The most common type of workplace pension scheme is now the DC, or “money purchase” scheme. You’ll make contributions into your pension pot each month and then use the value of this pot at retirement to buy a pension income. Following the introduction of Pension Freedoms legislation back in 2012, you have a lot of flexibility in how you opt to receive your pension income. Increased options are great news for retirees, but they mean increased levels of responsibility. You’ll need to budget effectively to ensure you don’t run out of money in retirement. We can help you manage this, so get in touch if you need our help. As you’ll see later, your DC scheme is also flexible in terms of the funds, contribution amounts, and payment methods you can select.
2. Is it a defined benefit (DB) scheme?
DB schemes, or “final salary” pensions, are thought of as the gold standard but are now much less common than they used to be. The amount you receive is based on your final (or average) salary and the length of your employment. The pension payout you receive could be more generous than you’d receive with a DC plan, and there are likely to be additional benefits like spouse’s pensions and generous payouts on death in service. DB schemes do give you less flexibility at retirement, though, so if you don’t know which type of scheme you are in, find out as soon as possible.
3. How much am I contributing?
Your auto-enrolment scheme must follow the minimum contribution rules. For the 2021/22 tax year, that means that you’ll be paying 5% of your pensionable earnings into your scheme each month. You’ll receive a further top-up of 3% from your employer, taking your minimum contribution to 8%. You’ll also benefit from tax relief, effectively a 20% top-up from the government. Depending on your salary and your desired lifestyle in retirement, you might find that 8% isn’t enough. You might think about the other income streams you’ll have in retirement and the private pensions you hold. You might also consider increasing your contributions.
4. Can I increase my contributions, and if so, will my employer match it?
While the minimum contribution is 8%, you can opt to pay more. This can help to increase your pot and could be especially useful if you find you have a pension shortfall in the runup to retirement. Your employer might already be paying more than the 3% minimum as a form of employee incentive, but even if they’re not, it doesn’t mean they wouldn’t be willing to. Consider increasing your contribution, but be sure to ask your employer whether they’d be willing to match your percentage increase.
5. Can I opt out of the workplace pension?
While you do have the option to opt out of your workplace pension scheme, this is rarely a good idea. The benefits of investment and compound growth, as well as your pension’s tax efficiencies, mean that even a brief gap in contributions could make a huge difference to the amount you receive in retirement. Be sure to speak to us if you’re considering opting out, and we can help decide if it is right for you.
6. Can I pay via salary sacrifice?
Salary sacrifice can have tax benefits for you and your employer so be sure to ask if it is something the company offers. Salary sacrifice means that you make pension contributions straight from your pay, thereby lowering your pre-tax salary. This lowers the amount of Income Tax and National Insurance (NI) you and your employer pay, particularly important in the face of imminent NI increases. Salary sacrifice won’t be right for everyone. Lowering your salary can affect your borrowing potential when applying for a mortgage and could also affect other pension benefits you hold.
7. Can I align my pension with my values on sustainability issues?
As we all become more environmentally conscious, you might want to align your investments with your values. Check with your employer to see whether you can change the funds you are invested in and seek out the ones with the best ESG (environmental, social and governance) credentials.
kamagra en ligneGet in touch If you would like to discuss your current workplace pension arrangements or any aspect of your long-term financial plans, please get in touch with our Bristol, Cheltenham or Wiltshire team and find out how our team of expert independent financial advisors can help.
Please note The value of your investments (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.