Becky O’Connor: Employers hoping to attract talent often offer more than minimum pension contributions
Becky O’Connor is Head of Pensions and Savings at Interactive Investor.
Think of a pension as a deferred pay raise and you will soon start to pay more attention to what is offered by a potential new employer.
The minimum contribution may be 8 percent of salary – including your own payments plus top-ups – but some employers are much more generous and total contributions from some workplaces account for more than 20 percent of salary.
Over a lifetime of earnings, this supplement can make the difference between a reasonably basic retirement and a comfortable retirement when you stop working.
By our calculations, a person starting their working life with a typical graduate salary of Â£ 25,000, receiving salary increases of 1 percent per year, investment growth 2.5 percent above RPI inflation, and 8 percent pension contributions would retire with a pot value of Â£ 186,000 at age 68.
This amounts to Â£ 464,000 with a total contribution of 20 per cent per year throughout working life – a whopping difference of Â£ 278,000.
If you are fortunate enough to choose between jobs with similar salaries, then the generosity of a pension may well benefit you.
Here’s what to think about and ask your potential employer’s recruiter or HR team before deciding on a job offer.
1. Matching contributions
The minimum automatic registration contribution, including employee and employer contributions, as well as tax breaks, is 8 per cent.
But employers who hope to attract talent often offer more and some programs offer maximum tax relief for employees / employers / above 20 percent.
However, you will usually have to contribute a larger portion of your salary in order to get the most from an employer.
Ask a potential future employer to what extent they will match or “double” your own contributions.
An example of a match is that you contribute 5 percent and your employer contributes 5 percent. Double matching would mean you pay 5 percent, including tax breaks, and your employer contributes 10 percent.
It should be remembered that with all pensions you can increase your contributions up to the annual allowance – normally Â£ 40,000, but there are different rules for very high incomes – or your maximum income whichever is lower. .
This applies even if the employer does not continue to match your contributions.
Note that your employer’s contributions and government tax breaks are factored into your annual allowance.
Who pays what in pensions? Minimum automatic enrollment fees for staff and employers, plus government supplement (Source: The Pensions Advisory Service)
2. Pension plan
Ask what type of retirement plan your potential new workplace offers. Chances are it is a âdefined contributionâ pension – so you know what to invest in it, but what you get out of it will depend on the return on your investment.
But if you take a job in the public sector it could be a âdefined benefitâ pension, in which case when you retire you will receive income based on your salary while you were working.
These are less common now but generally more generous overall.
3. Tax relief
Check the tax breaks you will receive on your contributions. Base rate taxpayers will receive 20 percent tax relief.
If you earn more than the top tax cutoff of Â£ 50,270 you can get 40% tax relief on contributions, and if you earn more than Â£ 150,000 you are eligible for tax relief 45% on contributions.
Likewise, the way tax breaks are applied to your occupational pension can make a difference to your take-home pay and how much goes into your pension fund.
Whether the plan takes “source relief” (after tax) or “net compensation” (before tax) may be particularly relevant.
For low wages in net pay schemes, people earning less than the personal allowance threshold of Â£ 12,570 will not receive tax relief because they do not pay income tax. With âsource relief,â they will still get tax relief.
For high income earners, if you are on a “source relief” scheme, you may need to apply for more than the base rate tax relief through your tax return – a little extra hassle.
Ask your employer: generous top-ups can more than double your retirement fund over the course of your working life
4. Responsible investment
If responsible investing is important to you, ask if your occupational pension offers sustainable or green investments either in the âdefault fundâ – the one you are automatically affiliated with when you join a plan – or in funds you can. choose yourself.
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The way pensions are invested by large plans in the workplace can have an impact on the planet, as they can be invested in fossil fuels or, more advantageously, renewable energies.
5. Salary sacrificed
Many employers are now offering “wage sacrifices”, reducing both the national insurance bill for the employee and the employer.
This could become a more pressing concern for workers after the introduction of the new tax on health and social assistance, which will add 1.25 percent to NI contributions starting next April.
Salary sacrifice means that you agree to forfeit part of your earnings in exchange for a higher pension contribution.
This may have other implications – for example, it potentially reduces your salary in mortgage affordability calculations – so it is important to understand this before agreeing to forgo salary in this way.
6. Your own Sipp
If you are an experienced and confident investor, you can ask if your employer would agree to put your retirement contributions into a Self-Invested Personal Pension (Sipp), so you can choose how to invest your own pension.
Some employers offer this and it can be a good option if you want access to a greater range of investment funds and full control over where your pension is invested.
7. Bonus redemption
Check if you are likely to receive a bonus and ask yourself if you could afford to invest it in a pension.
‘Bonus redemption’, where your bonus is paid directly into your pension, can result in a significant reduction in income tax and NI bill.
If this exceeds your annual allowance by Â£ 40,000 (or the maximum income, whichever is less) in a tax year, consider using the ‘carry forward’, which allows you to use the unused allowance from the three previous tax years.
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