Last Updated on 11 January 2021 by Dan
Hello everyone! Today I’d like to write about how you can potentially get free money – now there’s an offer you don’t get every day. Having a pension is something you’re likely now auto-enrolled in following Government legislation.
Often there can be significant benefits is making some changes to making sure you’re contributing more than the default minimum and some other tactics we can use to maximise what’s going into it. In many cases, these can literally provide you with the opportunity to gain free money.
What does a pension do?
Let’s start with the basics. A pension is a pot of money which is designed to cover you after you’ve stopped working in your retirement. The Government offers significant tax relief on these contributions, as it’s obviously beneficial to them that you can fund yourself in that period of your life rather than rely on state support.
Most people these days have a contributory pension, where both you and your employer pay a proportion of your salary into a fund over your career, and that money is invested to leave you with a bigger pot upon retirement.
Some people (generally older workers) may also have a final salary pension, where the company you worked for will continue to pay you a guaranteed annual income based on your final or average salary.
Owing to the tax relief, this isn’t quite the same thing as an investment pot – you can’t simply take money out of it when you like. Instead, it generally becomes available to you at the age of 55 to start drawing from (this can vary, and the default age will start to rise).
The amount both you and your employer are obliged to pay by default is 3% of your earnings is contributed by your employer, and 4% of your earnings is contributed by yourself. (This will be usually automatically deducted from your paycheck). You can read about those contributions at the Pension Advisory Website here.
You are auto-enrolled into these schemes and the above minimum, but may not be contributing on a regular basis if you have elected to opt-out.
Opting-out is never something I would recommend unless you desperately need the cash now. The benefit of those tax savings really does add up significantly over time, and you will feel the benefits later in life. Think of it as an investment in your future, literally.
If you have questions on if you’re presently enrolled on your pension scheme, your company HR department is usually a good place to start.
Why should I check my employers pension scheme?
As you’ve seen above, your employer is already contributing some additional money into your pension pot. You also have the right to voluntarily increase the % of your salary you’re putting into your own pension.
Firstly, you should consider this if you can. You get all the tax benefits of that additional contribution in the longer term – so that’s free money in itself.
However the big gain is that your company might literally give you some free money if you do. If you look through your employee handbook, or employee benefits guidance, you may find that the company will match any additional contributions up to a point. For instance, it may illustrate that “where you make pension contributions up to 6%, the company will also match this 6% contribution”.
This really is worth checking. You have to make a small sacrifice now in terms of converting some of your take home pay into that additional pension contribution, but when every pound is matched by your company, it really is well worth it. This can make literally thousands of points worth of difference to you, and tens/possibly even hundreds of thousands if you do this early to get it invested in the long run).
How to review a pension
Now there’s a few additional things you might want to consider to really get your pensions savings going – these require a little more work but can really add up.
In the above we’re looking at how you can maximise your contributions by getting the employer and the taxman to maximise the benefit you’re getting from your pension. With these tips we’re targeting the other end in terms of reducing the ongoing charges applied to pension that can take away some of your gains.
1. Review your Pension fees
The pension itself will me managed by a pension management company, who will charge a fee for that service. It’s usually somewhere between 0.25% and 2% a year.
Now if you’re at the higher end of that, that’s quite a spread – if it’s the very maximum it’s a 1.75% gain on your money ever year that you, not your pension provider could be getting. With pensions building up over time, the amounts in there can be reasonably large so again this can make a substantial difference.
It also needs to be balanced against performance though – if you’re consistently getting market beating performance from a higher cost pension, that can still be worth it. Rare this situation occurs though.
You have the right to transfer your pension to another provider, so it may be worth seeing if you can reduce those management costs by transferring it.
To do this, you may need to call your pension provider to understand what fees they are charging. Sometimes you’ll find things can be cheaper than you expect, as your workplace will also sometimes cover some of the management fees (or your workplace will have been given a bulk buy discount with the provider).
There can also be exit fees when leaving a pension provider, although this is becoming less common. This complicates things – you’ll need to make a personal judgement on if the fee is worth paying vs. the service you’re receiving and the gain you’d make on transferring it.
Just be aware that you want to be very sure of who you’re transferring it to and do your research. If your new provider performs poorly, you’ve made that choice of provider and the responsibility sits with you. You also want to be sure your new provider is genuine and reputable – unfortunately there are a significant number of pension scams out there, and you to not want to hand over your hard-earned pension to someone else.
2. Consolidate your pensions
If you’ve moved around a few jobs, you’ve probably got a variety of pensions stacked up. Once you’ve done the research above, it’s generally cheaper to have your pensions in one place as you can avoid some duplication of fees. As a result, once you’ve worked out who is the cheapest provider using the advice above, you may want to think about consolidating all of your pensions with them.
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