Making the most of your pension allocation

April 26, 2019
Taryn Lee-Johnston

Politicians of all persuasions clearly believe that saving for our old age is a good idea and are particularly keen on encouraging us to save via pensions.  While the cynical might suggest that the main reason politicians are so keen on saving for retirement via a pension is because pension funds are locked away until retirement, the fact is that the government does offer incentives to save through a pension and so it is worth at least looking at what is available before you take a decision on what is right for you.

The state pension

While it may seem odd to start with the state pension, the fact remains that it is a pension scheme into which everyone is, effectively, automatically enrolled assuming that they meet the qualifying criterion (i.e. they pay national insurance contributions) and it can be an extra source of funds in retirement.  If you are working and earning over a certain level of income, then you will have to pay national insurance whether you like it or not and therefore will automatically build up entitlement to a state pension.  If, however, you are not working, you may still be able to build up entitlement to a state pension if you are in receipt of certain benefits.  Therefore, it may be worth your while to claim these benefits even if you do not need the money or even if you do not get any money in your hand at this time.  Similarly, it may be worth your while to fill in gaps in your national insurance history in order to ensure that you have the necessary level of payments to qualify for a state pension.  There is, however, a caveat to this, which is that governments can change the rules on state pensions any time they like, for example, they can increase the age at which you receive one, hence if you do make extra payments towards your state pension, you may wind up receiving less benefit than you thought.

Workplace pensions

Under the government’s auto enrolment scheme, all employees who meet the qualifying criteria must be automatically enrolled into a workplace pension unless they specifically opt out of enrolment.  The employee is obliged to make (at least) a minimum level of contribution to which the employer adds (at least) a minimum level of contribution on top.  These employer contributions are the main advantage of saving for a pension via a workplace pension scheme versus a private pension, to which an employer is not obliged to contribute (although they may agree to do so voluntarily).  At the same time, however, it has to be noted that the workplace pension scheme (as it currently stands) has a conspicuous lack of flexibility.  Once you are enrolled in the scheme you must contribute at least the minimum amount for as long as you remain a member of it.  With private pension schemes, you are in control of the amount that you pay.

Private pensions

While the self employed, obviously, will not receive employer contributions towards their pension, they can still benefit from tax relief on contributions.  Similarly, home makers can benefit from their spouse’s tax contributions.  Under current rules, the earner can pay up to £2880 into their spouse’s pension and the spouse will receive the benefit of tax relief to a maximum of £720 meaning that the total contribution will be £3,600.  It is important to note, here, that although this is the maximum extent of the tax relief, this level of contributions may not be sufficient to provide the level of income you wish to generate for your retirement.  Therefore, it may be best to increase the level of contributions even if they do not attract tax relief.


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