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Workplace pensions have changed in recent years. Traditionally, the responsibility was on the employee to join their workplace pension scheme. Today in 2021, however, most employees are automatically placed onto their employer’s scheme under the UK’s “auto-enrolment” rules – although you can choose to opt out. The amount that you pay in depends on your salary, since contributions are a percentage of your pay. The higher your pay, the more you automatically pay in. However, given that the rules have changed a lot over the years, many people are still not getting the most from auto-enrolment. Below, we explain some ideas showing how to do this.
Make sure you are opted in
The current auto-enrolment rules apply to those aged between 22 and state pension age (i.e. 66 in 2021 for men and women born after 5th April 1960). You also need to work in the UK and earn over £10,000 per year. If your earnings are below this but over £6,240, however, you can ask to join your employer’s scheme – by law, they are not allowed to refuse. There are also exclusions for those in a limited liability partnership, self-employed people and sole directors who have no staff.
In 2021-22, employees meeting these criteria are required to contribute at least 5% of their salary between the lower and upper earnings thresholds to their workplace pension. Employers must put in at least 3%. It is this latter aspect that makes it important to strongly consider enrolling on your employer’s scheme, since this 3% amounts to “free money” towards your pension. Combined with the tax relief on contributions offered by the UK government (e.g. 20% for Basic Rate taxpayers), auto-enrolment has the potential to significantly boost your retirement savings without requiring more from your pocket.
Should I pay more?
As mentioned, as an employee the minimum contribution under auto-enrolment is 5%. Should you consider putting in 7%, 12% or even more? As a general rule, this may be a good idea if your employer will match your contributions. Some will do this up to a certain limit – e.g. 7% – and can be considered as a tax-efficient “pay rise”. However, you may wish to hold off from increasing contributions if you have expensive debts to pay off (e.g. unpaid credit cards with 20% APR). You should also weigh up whether it may be better to open up your own private pension alongside your workplace scheme, and put extra contributions in there.
Using a private pension with auto-enrolment
Whilst employer contributions are very welcome, there are drawbacks to workplace pensions. First of all, many offer a limited range of investment options, restricting the diversification of your pension. For instance, many default fund options are often highly weighted to the UK.
Whilst many auto-enrolment schemes are very competitively charged, there are still some with high charges (including annual management and platform fees), and even the lower cost arrangements attract higher charges if you elect for any ‘extras’, such as externally managed funds.
Finally, if you ever leave your job you likely will not automatically take your workplace pension with you (although you can usually transfer the fund to another provider). If you change jobs only once every few years, if you don’t consolidate your pensions each time, you could end up with several pensions. This can create problems later when you approach retirement, as you may need to track down old schemes.
It can be useful to have your own personal pension, to run alongside your workplace scheme, which can follow you from job to job. Some employers may even be willing to contribute to your private scheme instead. A personal pension can also give you a wider range of investment choices and facilitate ongoing advice fees – potentially increasing your real returns, and improving your retirement lifestyle options later.
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