Maximise your pension

Contributing towards your pension each month is a great step to ensuring you are set for the future. But are you getting the most from your pension? Here are a few things to consider to help you maximise your pension contributions and reap the benefits.

Getting the most from your employer

Making the most of any contribution matching offered by your employer is a straightforward way of getting more bang for your buck when it comes to your pension contributions.

Every time you pay into your pension your employer also makes a contribution, which helps to boost the total you put away each month. Under the rules of auto-enrolment, there is a minimum contribution rate of 8% of your qualifying earnings. Employer’s must contribute at least 3% (though they can contribute more), with employees paying in the remaining 5%.

Some employers offer to pay more than the minimum 3% into your pension if you choose to increase your contributions too. This is known as ‘contribution matching’.

If your employer offers contribution matching, you may want to consider paying more into your pension to take advantage of this. For example, if your employer matches your contributions up to 5%, then contributing 5% of your salary would effectively double your pension contribution to 10% each month.

Going above and beyond

Of course, just because your employer might only match your pension contributions to a certain point, that doesn’t mean you can’t contribute more if you want to.

You can technically contribute up to 100% of your salary into to your pension, and while most people won’t be contributing anywhere near that amount it does show that you have a lot more flexibility to pay more into your pension, should you wish. Realistically, there’s going to be a limit to what you are able to contribute each month while taking home enough pay to enjoy the lifestyle you want but if you find yourself with extra cash left over at the end of each month, increasing your monthly pension contributions could be a good way to use those funds.

Making the most of tax benefits

But why not simply put this money into a savings account? Well, saving is still a great use of your hard-earned money but pension contributions have tax benefits that makes them an extremely good value-for-money investment. This is because you benefit from tax relief. This mean your pension contributions are taken from your salary before any tax deductions, so the tax you would pay on those earnings is paid into your pension savings instead.

 So if you’re a basic rate tax-payer (earning £12,571 - £50,720), and paying the minimum of 8% total contributions, it means that every £10 you pay into your pension from your salary only costs you £8. In addition, your employer also contributes an extra £6 to your pension pot, on top of the salary you receive. So for every £16 going into your pension pot you pay £8, which makes it a great way to save for the future. Potentially even more depending on your employer’s contribution matching policy.

Additional contributions to give you a boost

The more you are able to pay into your pension pot, the more money you are likely to have in your pension when you retire. Not everyone will have the means to pay in more, but Additional Voluntary Contributions (AVCs) can be a great way to help ensure you are as prepared for the future as possible, especially if you come into an additional sum of money beyond your usual monthly income (i.e. a bonus, inheritance, or large commission payment).

Crucially, any contributions you make via AVCs are taken from your pay before tax, so the money you’d normally pay as income tax automatically goes into your AVC pot instead. Please note that an annual pension allowance is set at £60,000 and this is the total value that can be paid into all your pensions each tax year before triggering a tax charge.

If you want to set up an AVC, either as a one-off lump sum payment or as a regular deduction from your salary on top of your normal pension contribution, you can arrange this by completing an Application to Pay Additional Voluntary Contributions form and then giving this to your employer.

Please note that not all schemes support AVCs so please check this with your employer.