Your employer must sign you up to a pension
The good news is that if you’re employed, aged between 22 and State Pension age, and earn at least £10,000 a year, by law your employer must auto-enrol you into a company pension scheme.
If you don’t meet the eligibility criteria for auto-enrolment, but you earn over £6,136 a year and are aged over 16, you can still opt in to your company scheme if you want to. This means that a percentage of your salary will go into a pension each month, which is supplemented by your employer and the taxman paying into your pot, bumping up your total pension contributions.
Workplace pension schemes are most commonly used, which are known as ‘defined contribution’, plans, where the fortunes of your pension funds are linked to the investment performance of the funds you are invested in.
There’s a minimum total amount that you must pay in. In the 2020-21 tax year, you must contribute 4% and your employer 3%, with the tax man adding a further 1%, bringing the minimum total contribution to 8%. This makes it a 50:50 scheme, with you contributing half and your employer and the taxman the other half. You may find your employer makes more generous contributions, which will further boost the amount you end up with at retirement.
The automatic pension contribution applies to anything you earn over £6,136, up to a limit of £50,000 in the current tax year - this slice of your earnings is known as “qualifying earnings”. For example, if you were earning £24,000 a year, your contribution would be 5% of £17,864 (the difference between £6,136 and £24,000).
If you wish to, and can afford it, you can pay more into the pension than the 4% minimum. This additional sum can also be adjusted, stopped and started as suits you. Some employers will match any additional contributions you pay in up to a certain threshold, so it’s worth checking if yours will.
Your contributions will be boosted by tax relief
You’ll get tax relief on any pension contributions at your personal tax rate, so the more you pay in, the more you’ll get as a boost from the government.
You receive tax relief at the basic rate of 20%, so the taxman tops up every £80 you pay in to £100. This is how your 4% auto-enrol contribution get supplemented by 1% from the tax man. If you’re a higher or additional rate taxpayer, you can claim back up to an extra 20% or 25% on top of this via your self-assessment tax return.
The benefit of tax relief depends on your personal circumstances, and tax rules could change in the future. Similarly, the rules governing pension schemes might change in future too.
There are three types of personal pension if you don’t have access to a workplace scheme
If you haven’t been auto enrolled into a company pension scheme, perhaps because you’re self-employed, on a career break, or are caring for family members, you can set up a personal pension. This also applies to members of company schemes who do not wish to pay additional contributions to their workplace scheme.
There are three main types of personal pension: stakeholder pensions, standard personal pensions and self-invested personal pensions (SIPPs). The right one for you depends on how much you have to pay in, the range of investments you want access, the costs and how much control you want to have over the underlying investments.