Expert Advice on Increasing Pension Contributions
In our weekly series, readers can send in their questions related to retirement and pension savings, which will be answered by our expert, Tom Selby, who is the director of public policy at investment platform AJ Bell. Tom possesses extensive knowledge about pensions, so if you have any inquiries, feel free to reach out to us at [email protected].
Question: I’m looking to boost my pension contributions, but my employer has informed me that they cannot accommodate this request. Is this compliant with regulations? Are they obliged to allow me to increase my own contributions? What steps can I take to enhance the amount I’m contributing?
Answer: The “automatic enrolment” reforms implemented in the UK from 2012 to 2019 mandate that employers must provide a workplace pension scheme that adheres to specific minimum standards for eligible employees. Upon meeting the criteria, employees are automatically enrolled in the scheme, although they have the option to ‘opt-out’ if they wish.
To qualify, employees must be aged between 22 and 66 and earn over £10,000 annually. Those who do not meet these criteria can still “opt-in” to their workplace pension scheme. Employers are legally required to contribute a minimum of 3% of “qualifying earnings,” while employees typically contribute 4%, with an additional 1% coming from pension tax relief.
“Qualifying earnings” refer to the income range between £6,240 and £50,270. For instance, if you are enrolled at the minimum contribution level and earn £30,000 a year, your total annual contributions would amount to 8% of £23,760 (which is £30,000 minus £6,240), translating to approximately £1,900.
Your workplace pension scheme is also obligated to provide a “default” investment option, which charges a maximum of 0.75%. If you choose not to make any investment decisions, your contributions will be directed to this default fund. While some schemes may offer a variety of investment choices, they are not required to do so.
Many employers provide enhanced contributions as part of their overall compensation package, so it’s beneficial to engage in dialogue with them to maximize your pension benefits. Remember, employer contributions are essentially free money, and saving more—especially early in your career—can significantly increase your retirement savings.
Typically, you should have the freedom to raise your personal contributions to your pension scheme, even if your employer does not match these increases. It may be possible that your employer misunderstood your inquiry, thinking you were asking about their contributions instead of your own. Therefore, it’s advisable to clarify your request with them.
If your employer remains unhelpful, I recommend contacting the pension scheme that manages your contributions, as they operate independently of your employer, to explore alternative methods for increasing your monthly contributions.
Another option is to establish a personal pension plan, such as a Self-Invested Personal Pension (SIPP), where you can direct additional contributions. Contributions to a SIPP also benefit from upfront tax relief and tax-free investment growth, similar to a workplace scheme. Many SIPPs provide a diverse range of investment opportunities tailored to your preferences, although unlike auto-enrolment default funds, they are not subject to a charge cap. If you decide to go this route, it’s crucial to evaluate the overall value for money of your chosen provider, including the fees they impose.
Additionally, it’s important to be aware of the main limits regarding pension contributions that qualify for tax relief. For most individuals, the key factors are the overall annual allowance and your “relevant earnings.” The annual allowance is currently set at £60,000 for the majority, encompassing personal contributions, employer contributions, and tax relief. High earners or those who have accessed taxable income flexibly may face a reduced annual allowance.
You can only make personal contributions up to 100% of your UK relevant earnings in the tax year in which they are made. Relevant earnings cover salary, bonuses, and commissions. For example, an individual with £30,000 in UK relevant earnings could contribute £24,000 to a pension and receive a £6,000 tax relief boost added to their scheme.
