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If you want to enjoy a comfortable retirement, it’s important to have enough income to support your desired lifestyle. This is where workplace pensions can help you, as they are an effective and tax-efficient way to build up your wealth.
But if you want to save effectively, it’s important to be able to make educated decisions. So, read on to find out five important questions you should ask your employer about your workplace pension.
1. How much do I pay into my workplace pension?
As you might imagine, one of the first questions you may want to ask is how much of your salary you’ll be paying into your pension each month. Not only does this affect your take-home pay, but also how quickly you build up your long-term wealth.
As of October 2021, all British workers have to contribute 8% of their salary into their workplace pension. But importantly, this sum is made up of three parts: your employer’s contributions, your own contributions, and finally tax relief.
Employer contributions
Typically, your employer must contribute a minimum of 3% of your salary into your workplace pension. Of course, it’s important to bear in mind that this isn’t a maximum threshold – in fact, some companies offer a higher rate as an incentive to attract new members of staff.
Furthermore, some employers also offer to match your pension contributions when you increase your own, which can be a valuable way to save more for the future.
Your contributions
Since your employer must contribute at least 3% of your salary into your pension, this means you’ll have to put in the remaining amount. This final 5% is made up of both your contributions and government tax relief, which we’ll explain in the next section.
Typically, your contributions are taken directly from your paycheck each month, which can be useful as you don’t notice that it’s gone.
Tax relief
When you pay into your pension, the government tops up your contribution with tax relief. This is essentially the money you would have paid in Income Tax, so the amount you receive depends on your tax band.
For example, if you’re a basic-rate taxpayer then a £100 contribution to your pension would only cost £80, as the government would add that extra £20 in relief.
It’s also important to remember that there is an annual limit for how much of your contributions you can receive tax relief on, which is called the “Annual Allowance”. In the 2022/23 tax year, this limit stands at £40,000 or 100% of your salary, whichever is lower.
2. Can I opt out of my workplace pension?
While your employer legally has to offer you a workplace pension scheme, you can choose to opt out. Doing so will mean that your monthly salary could be slightly higher, as you’ll receive that extra money that was instead being put into your fund.
Typically, if you opt out within one month of starting with the company, your contributions will be returned to you. If you exit the scheme after this point, you won’t usually be able to access any of the money in your pension fund until you retire.
Of course, if you are tempted to opt out then it can be important to think very carefully about your decision. By exiting the scheme, you won’t receive the benefits of any employer contributions, tax relief, or the returns that your investments would have generated.
If you want to know more about whether this decision would be right for you, it can be hugely beneficial to speak to a financial planner before you act.
3. What type of pension scheme does my employer offer?
Typically, most employers will offer one of two different types of pension scheme: defined contribution (DC) or defined benefit (DB). While it’s easy to be put off by the jargon here, they’re much simpler than you might think.
If you have a DC pension, it means that the amount you’ll receive when you come to retire is largely based on how much you put in, as well as the growth your investments have generated.
On the other hand, DB pensions pay you a guaranteed annual income for life. The criteria for how much you’ll receive is typically based on your annual salary and how long you worked at that company for.
While DB pensions are much rarer now, they are still offered by some employers so it’s important to ask your boss to see which type you have.
4. Do you offer salary sacrifice?
To put it simply, salary sacrifice involves reducing your monthly pay in exchange for greater pension contributions from your employer. If you want to put more aside, so you can enjoy a more comfortable retirement, then this can be a very useful option.
Sacrificing a portion of your salary can also mean you pay less National Insurance (NI) too. Since pension contributions paid through salary sacrifice aren’t considered a part of your pay packet, they’re often free from NI charges.
Of course, it’s important to remember that salary sacrifice could have wider implications for your overall financial wellbeing. For a start, if you have less take-home pay, you may struggle to pay your bills if the cost of living crisis worsens.
Furthermore, your mortgage eligibility is often calculated using your salary, which means if you reduce your annual earnings then you may not be able to borrow as much. This could make it more difficult for you to get onto the property ladder.
5. Can I switch to a sustainable pension?
If you want to do your bit to help fight climate change, you may want to switch your pension to a sustainable fund. That’s why you may want to ask your employer whether you have the option to change provider.
According to research published in Climate Action, this simple change could massively reduce your carbon footprint. In fact, according to the report, switching to a green pension is 21 times more effective than giving up flying, switching to vegetarian meals, and changing your energy provider.
As we discussed in previous guide, moving to a sustainable funds can be a great way to align your investments with your values. For example, you may choose to exclude certain industries, such as tobacco or car manufacturers, and prioritise ones which lead the way in renewable energy.
Get in touch
If you want to ensure that you’re building wealth effectively for retirement, we can help. Email us at office@verve-financial.com or call 0330 320 5048.
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.
