Auto enrolment was introduced to ensure that everyone – or at least, every employee – can look forward to a workplace pension.
More than 800,000 employers and eight million workers now have workplace pension schemes as a result.
Initially, contribution rates were set at a minimum of just 2% of qualifying earnings, with at least 1% coming from the employer. Since April of this year this rose to 5% – typically 2.4% from the worker, 2% from their employer and 0.6% tax relief. In April 2019, there will be a further increase to 8% with a minimum of 3% from the employer.
But contribution rates may still be too low to build up the kind of pension pot needed for a comfortable old age. It makes sense to look at ways to make auto enrolment work harder still.
Paying in more to your workplace pension
You may find that the increase in your statutory contributions means you are bringing home less, and you might even be tempted to opt out of your workplace pension to have a little more cash to spend now.
This would be a mistake. Not only would it mean missing out on saving for your retirement, it would mean you would actually be earning less. You might not be able to spend the money now, but your employers’ contributions are saved and working for you.
Far from opting out, you could actually opt to pay in more to your pension. It would be especially worthwhile if your employer agrees to match your contribution.
Claiming back the tax
In addition, if you are a higher rate taxpayer, you need to ensure you get the tax relief you are entitled to. Tax relief is a refund of the tax you paid on cash put into your pension at your usual rate of income tax. This may be 20%, 40% or 45%.
To get £100 put into a pension, a basic-rate taxpayer needs to pay in £80. The taxman then hands back the £20 taken off which goes into your investment pot. Higher-rate tax payers save £60 to get £100, and top-rate taxpayers £55.
Some firms claim back the tax relief for higher earners automatically. Check yours does, and if it does not, you’ll have to claim the extra 20% or 25% via your self-assessment tax return. If you don’t normally fill in a tax return, call or write to HMRC.
Look at salary sacrifice
Your employer may offer you a salary sacrifice option. This means giving up part of your salary (your sacrifice), which your employer then pays into your pension, along with their contribution.
As you’re earning a lower salary, both you and your employer pay lower National Insurance Contributions (NICs). Your employer may pay part or all of their NIC saving into your pension, although they don’t have to.
Your employer should give you an overview of how salary sacrifice might affect you, your pension pot and your take home pay.
What should you do?
With a State Pension worth only around £8,500 per year, your workplace pension will have to work hard to provide the income you need. You need to make the most of its potential, and if it still can’t offer the quality of retirement you need, it might be time to talk to the Continuum team about how you could set up a private pension to work alongside it.
FCA do not regulate Auto Enrolment.
The value of pensions and the income they produce can fall as well as rise and you may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.
thepensionregulator.gov.uk – ‘We will take action against employers failing to pay into pensions’ – TPR – 13th November 2017