How do workplace pension schemes work?
Is your employer offering a pension plan? If yes, continue reading!
If you haven't signed up for it or contributing to it, you are missing on free cash, but also missing out on the power of compounding. Check with your HR department the type of plan they are offering and subscribe for it.
Each month, when you contribute to your pension pot, your employer will be “matching” your contribution - offering you free cash - and you will also receive some tax advantages.
Show me an example please
Let’s work out an example for Sara, 28 years old, earning £30,000 per year (This assumes your employer will make the legal minimum contributions based on part of your salary only).
The pay on which her contributions are based is: £24,176 per year or £2,014.67 per month (It is her earnings before tax (up to a maximum limit of £42,385 per year) – less the lower earnings threshold of £5,824).
Let’s assume Sara decides to contribute 1% a month in her pension, and her employer is matching the 1% contribution:
Sara’s 1% contribution equals to £20.15 (monthly salary multiplied by 1%) of which 20% is a tax relief = £4.03.
Which means each month Sara is contributing £16.12 to her pension.
When Sara contributes £16.12, her employer contributes £20.15 and she also receives £4.03 in tax relief, adding up to £40.29 per month, or £483.52 a year! Without the employer matching, she would have contributed half of this amount.
£16 a month is a very small amount, think a week of coffee or 2/3 lunch boxes brought from home instead of buying your lunch. This will however make a big difference in the future!
You can use the calculator on Money Advice Supermarket to check your own situation.
No one else is going to fund your retirement, so start contributing now 💷💷!
Fact: For people in their 20s and 30s, retirement is edging further away. Forecasts by the Department for Work and Pensions (DWP) suggest the average retirement age needs to increase by six months every year to reflect longer life expectancy. This means over the next 30 years, people would stop work at age 80!