How Do Workplace Pensions Work? #Hotline

Welcome back to The Hotline! Today we answer a question from Jamey — a 26-year-old who is a passionate advocate for young people getting an early start on saving for retirement. 

Having recently started a new job, Jamey wants to increase how much she pays into her workplace pension. However, her employer is hesitant due to the perceived admin involved. She asks us how to move the conversation forward and what other options are available to her. 

💥Today on The Wallet: 

1️⃣Financial Adviser, Lisa Conway-Hughes joins me to provide an overview of workplace pensions, how they work, how much you can save each year and the benefits of opting in.  She also co-runs The Ladies Finance Club.

2️⃣It’s a common concern that the state pension won’t be enough to support us in our retirement years, so Lisa walks us through the different private pensions available and how to get to grips with planning for our future selves. 

3️⃣ Getting started with pensions if you haven't already can feel like a daunting task, but Lisa highlights the best way to approach this even if you feel like you're behind.

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the workplace pension basics

  • Payments made into a pension are called contributions. With a workplace pension, contributions come from three sources: the employee, the employer and the government. Your workplace pension pot is completely separate from the State Pension.

  • The minimum total contributions under automatic enrolment have been set by the government, which is 8% for most people. Your employer must contribute a minimum amount, this is usually 3%. The government will also help you save for your pension by giving you tax relief on your contributions.

  • Your employer might offer you the option of salary sacrifice. This is a way to make your pension saving more tax-efficient and could mean your take home pay increases. If you choose to take up salary sacrifice, you and your employer will agree to reduce your salary, and your employer will then pay the difference into your pension. With salary sacrifice, you and your employer pay lower National Insurance contributions (NICs). Your employer might pay part or all their NIC saving into your pension too, although they are not obliged to.

  • Currently, the full level of the new State Pension is £9,339.20 a year. You qualify for the full amount if you’ve made NI contributions for 35 years or more.

  • There is a limit on the total amount you can save each tax year and the tax relief you receive on your contributions. The limit is currently £40,000. You can also only receive tax relief up to 100% of your earnings.

  • If you’re a high earner with an income of over £240,000 a year, the amount that you get may gradually decrease to as low as £4,000.

  • If a tax year's unused annual allowance isn't fully used, it can only be carried forward for up to three years.

  • You will have to pay tax if your pension pots are more than the lifetime allowance, which is currently set at £1,073,100.

Planning for your future

  • As a rule of thumb, to calculate how much you should be paying in, take your age and divide it by two. The amount you get is the percentage you should be paying into your pension.

  • If you feel like you got started with your pension a little later than you would’ve liked, you can either try paying in more (if you’re able to), or you can consider taking on a bit more risk to make up for the shortfall.

  • You need to figure out what kind of retirement you want. While the assumption is that you won’t be spending as much in your retirement because your mortgage payments will be paid off, the reality is that you’ll be on an eternal weekend — so do plan accordingly!

  • Women live longer than men, and tend to earn less than men, which is why it’s so important that we have enough to retire on. The pension gap is at 51%, and while we’re heading in the right direction, it’s not enough. Compounded over time, this has a very big impact.

  • It’s important to have the conversation about splitting your pension between yourself and your partner — because if the man holds all the pension in retirement, he will have to also pay more tax and the woman won’t be making the most of her allowances.

you can have a collection of pensions

  • You can have as many pensions as you want, and you can pay into as many as you want. Whether or not you want to consolidate your pensions is down to the numbers.

  • The benefits of consolidating your pension is having less admin, but also before you move anything, you have to find out whether there are any guarantees / whether you have any protected tax-free cash that you’d lose if you were to move.

  • If you’re just starting out with your pension, the key driver is costs and cheap investments. You need to shop around for a platform that best suits your needs.

  • It’s important to get started (you needn’t be a pensions expert!) and build your confidence, and once you have that you can work on your portfolio and change your asset allocation.

  • Most pension providers have a ‘let us do it for you’ option, so you don’t have to do any in-depth research in order to simply get started.

  • When you talk to your employer, it’s worth checking if they’re matching your contributions. Some employers do offer very generous pension schemes, eg. for whatever you put in, they will match.

  • An employer that cares will offer you a good pension — so if you find yourself at a company that isn’t offering you much, it might be a wider sign of a poor culture.

  • Remember that you’re a customer of that particular pension — so you have every right to demand that you’re looked after properly.

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