In our weekly series, readers can email in with any question about retirement and pension saving to be answered by our expert, Tom Selby, director of public policy at investment platform AJ Bell. There is nothing he doesn’t know about pensions. If you have a question for him, email us at [email protected].
Question: I want to increase my pension contributions but my employer has said they can’t do it? Is this against the rules – and do they have to let me increase my own contributions if I want to? What can I do to boost the amount I’m paying in?
Answer: “Automatic enrolment” reforms rolled out in the UK between 2012 and 2019 mean employers are required, by law, to offer a workplace pension scheme that meets certain minimum standards to employees who qualify. Qualifying employees are automatically enrolled into the scheme, although they have the option to ‘opt-out’ if they want to.
Those aged 22 to 66 and earning more than £10,000 per year qualify for auto-enrolment, although those outside these parameters can “opt-in” to their workplace pension scheme. Firms are required to contribute at least 3 per cent of “qualifying earnings”, with employees paying in 4 per cent and 1 per cent coming via pension tax relief.
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Read More“Qualifying earnings” are earnings between £6,240 and £50,270, so if you’re auto-enrolled at the minimum and earn £30,000 a year, your total annual contributions will be 8 per cent of £23,760 (i.e. £30,000 minus £6,240), or around £1,900.
Your workplace pension scheme also has to offer a “default” investment charging a maximum of 0.75 per cent which your contributions will be invested in if you do nothing. Some schemes will offer you a choice of different investments, although they are under no obligation to do this.
Plenty of employers offer more generous contributions as part of their overall remuneration package, so it’s always worth speaking to them to ensure you’re making the most out of your pension. An employer contribution is essentially free money and the more you can save, particularly in the early part of your career, the more you’ll have in your pot when you reach retirement.
You should usually be free to increase personal contributions to your scheme even if your employer doesn’t “match” these and I’d be extremely surprised if any provider was unwilling to let you do this. It may be that your employer believed you were asking about them increasing their contributions rather than you increasing your own, so as a starting point I’d double check with them. If they refuse to budge, speak to the scheme receiving your money – which will be separate from your employer – to see if there are alternative ways to top-up your monthly contributions.
The other option is to set up a non-workplace pension scheme, such as a SIPP, and pay your additional contributions into this. Any contributions will benefit from upfront tax relief and tax-free investment growth, just like your workplace scheme.
Many also offer a range of investment options to suit your needs, although these will not be subject to a charge cap in the same way as an auto-enrolment default fund. If you opt for this route, it’s important to consider the overall value-for-money of your chosen provider, including the charges they levy.
You should also be aware of the main limits that apply to pension contributions which benefit from tax relief. For most people, the key ones are the overall annual allowance and your “relevant earnings”. The annual allowance is currently set at £60,000 for most people, covering personal contributions, employer contributions and tax relief. Very high earners or those who have accessed taxable income flexibly from their pot may have a lower annual allowance.
In addition, you can only make personal contributions up to 100 per cent of your UK relevant earnings in the tax year they are made. Relevant earnings include things like salary, bonuses and commission. For example, someone with £30,000 of UK relevant earnings could pay £24,000 personal contributions to a pension, and receive £6,000 tax relief paid into the scheme.
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