Retirement planning is an important part of your long-term financial stability, but many people in the UK are not on track to meet the minimum requirements needed to afford even a basic lifestyle in their later years.
For example, Scottish Widows notes that, since 2023, 1.2 million more people are not on track to meet the Retirement Living Standards set out by the Pensions and Lifetime Savings Association, the minimum of which is currently £14,400 a year for a single person, or £22,400 for a couple.
Moreover, Scottish Widows states that most people would like to retire at the age of 62. But, 54% of those individuals think they will need to work an average of seven additional years to manage the costs of retirement.
Fortunately, your company pension scheme can provide a much-needed boost to your retirement savings, with a host of ways for you to make the most of these valuable benefits. Here’s what you need to know.
1. Employer contributions add to the value of your pension pot
Under the Pensions Act 2008, every employer in the UK must enrol their eligible staff into a workplace pension and contribute to it along with the employee.
Your employer must contribute if you are between 22 and the State Pension Age, which is currently 66 for those reaching State Pension Age now. There is also a phased increase planned, which will increase the State Pension Age to 67 and eventually 68.
As well as this, you must earn more than £10,000 a year to be eligible for compulsory employer contributions, whether you’re on a short-term or zero-hours contract, on parental leave, or if an agency pays your wages.
Currently, under auto-enrolment rules, 8% of your qualifying and pensionable earnings must go into a pension pot. Employers typically contribute a minimum of 3%, while you contribute the remaining 5%. In some cases, such as group personal pension schemes, these percentages may differ.
Depending on your level of disposable income, you may find that you can increase your contributions, which could help grow the value of your pension pot.
2. You’ll receive tax relief on your pension contributions
Another major benefit to contributing to a pension, whether it’s through a workplace pension or not, is the tax relief afforded to pension contributions. This relief can apply in two ways:
- Relief at source: Contributions are deducted from your net pay, with basic-rate tax relief (20%) added to the pension fund.
- Net pay arrangements: Contributions are deducted from your gross pay, which reduces your taxable income.
Both methods essentially enhance the value of your pension contributions, as some of the money that you would usually pay in tax is put into your pension pot instead. The amount of tax relief you receive is based on your marginal rate of Income Tax.
As a basic-rate taxpayer, you’ll receive pension tax relief at 20%. In essence, for every £100 that goes into your pension, you only pay £80.
Higher-rate taxpayers and additional-rate taxpayers receive 40% and 45% tax relief, respectively, meaning a £100 contribution would only “cost” £60 or £55.
Salary sacrifice may also be used to make your contributions. This is where you choose to give up a part of your pre-tax earnings, reducing your overall salary, and your employer pays these “sacrificed” earnings directly into your workplace pension. This means you pay less tax and get to keep more of what you earn overall.
3. You’ll receive tax-free growth and be able to make limited tax-free withdrawals
As well as receiving tax relief on what you pay into your pension, growth on your pension savings within the fund is also generally free of tax. With other investments, you may be liable for Capital Gains Tax (CGT). This is not the case with pensions.
Moreover, the first 25% you withdraw from your pension pot is tax-free. This is called your “pension commencement lump sum” (PCLS). The amount you can withdraw tax-free will either be 25% of your pot or £268,275 (in 2024/25), whichever is lower.
For example, if you had £320,000 in a pension pot, you could withdraw up to £80,000 tax-free.
However, you can use your PCLS in several ways, from withdrawing a single lump sum or as a way of tax-efficiently supplementing your income over time.
4. There’s potential for long-term investment growth
Pension funds are typically invested in a diversified portfolio of assets, offering the potential for long-term growth. If your employer is contributing to your pension at the same time as you are, your growth potential could increase.
Particularly, the effects of compound interest and returns can significantly increase the value of your investments over time.
This means, in simple terms, that any interest you earn from your savings can also earn interest, and investment returns paid to you such as dividends can be reinvested, with those returns then having the potential to generate more returns and so on. This typically results in your pensions constantly growing by a greater amount each year.
For example, according to HSBC, if you started with a £30,000 investment and added £200 each month for 25 years, you could potentially earn up to £320,000 in good market conditions with a medium risk level.
If you were to increase your monthly contribution by just £100, that number could rise to £394,000.
That being said, the performance of any investment is subject to market conditions, and the value can go up or down.
5. You could consolidate old pensions into your current workplace pot
If you have accumulated several pension pots from previous employments, then you may want to consider consolidating these into your current company pension scheme. This process involves transferring the value of your other pensions into a single account.
Not only could this mean less admin for you, but you could also benefit more from compounding by combining the values of several smaller pots.
However, there are a few things to think about before consolidating your pensions:
- Consider your pensions’ individual investment performance before making any decisions.
- Understand the potential loss or gain of valuable benefits that come with the pension scheme.
- Carefully consider the potential effects of charges and fees on old pots.
Consolidating your old pensions into your current workplace pension could benefit you in the long run, but it will ultimately depend on your individual circumstances and needs.
If you do have any old pensions you think you could consolidate into your workplace scheme, we can review these on your behalf.
6. You’ll likely experience more peace of mind and financial security
Beyond the more tangible financial benefits, company pension schemes can offer an important sense of security and peace of mind.
The State Pension, while a valuable foundation, may not be enough for you to live comfortably in later life. Meanwhile, contributing to your company pension scheme now could ensure a robust and sustainable income stream during retirement.
More than that, knowing that you are working towards building a retirement fund can help alleviate any anxiety and stress that may come from thinking about the future.
Long-term planning is vital for future financial security and the sooner you start saving for retirement, the better. That’s why company pension schemes are useful, as they can provide a valuable boost to your savings.
Get in touch
Email advice@apogeewealth.co.uk or call 01565 757811 to learn more about how we can help you build a stable and secure financial future.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.
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