Understanding the basics of workplace pensions
There’s no such thing as a free lunch and you can’t have your cake and eat it. You can, however, make use of tax breaks to reduce the amount of money you hand over to the government and, hence, increase the amount of money you have available for your own use. In some cases, there are conditions attached to the government’s generosity. For example, the reason why the government gives tax relief on pensions contributions is, of course, to encourage people to make provision for later life and, hence, to reduce the likelihood that you will need to rely on the state in later life. This reality does not, however, alter the fact that the tax relief on pensions can be massively useful, especially if you can combine them with pension contributions from an employer.
Understanding tax relief on pensions
If you have a total taxable income of up to £150,000 per annum, any contributions you make to a pension are free of tax, up to a maximum of your earnings, or £40,000, whichever is the less. For every £2 of total taxable income over £150,000, your entitlement to relief on pension contributions will be reduced by £1. So basically, if your total taxable income is £230,000 or more, then you will lose your pension relief in its entirety. For the sake of clarity, total taxable income means salary, dividends, rental income and savings interest plus the value of any employer pension contributions.
Understanding employer contributions
If you are in paid employment and qualify for auto-enrolment, then your employer is legally obliged to make contributions into a pension fund for you, unless you choose to decline them, which is generally known as “opting out”. The reason for accepting these contributions is obvious. There is, however, a very valid potential reason for declining them. This is that the auto-enrolment scheme, as it stands, requires contributions from both the employer and the employee. The employee contributions are taken out of your gross salary, which means that you will pay less tax on your earnings. You will, however, see your take-home pay slightly reduced. If this is a major issue for you, for example, if you are in a situation where you really need every penny of your pay, then you may wish to ask your employer if you can opt-out of the auto-enrolment scheme, but have them pay their contributions into a private pension scheme on your behalf. They are not obliged to do this but may choose to do so to promote employee satisfaction. Be aware, however, that employers are unlikely to appreciate people chopping and changing arrangements and so will probably appreciate you picking one option and sticking to it for as long as you reasonably can. It’s also worth remembering that even if you opt-out of a workplace pension scheme now, your employer is legally obliged to allow you to enrol at a later date, hence enrolment is something you could work towards.
Keeping track of workplace pensions
Saving into a workplace pension is all well and good, but it’s only going to benefit you if you are able to access the funds upon retirement, which means remembering where they are. The government operates a Pensions Tracing Service, which can help to reunite you with old employers, or, at least, those in charge of their pension schemes. Given the importance of pension saving, however, it is very advisable to take a “belt-and-braces” approach to keeping tabs on old pensions and, in particular, to keep accurate records of your employment history along with the relevant pensions contacts. It’s also highly recommended to make sure to update the necessary people when your contact details change.
For Pensions We Act As Introducers Only