We’re exploring pension-related terms and breaking these down one at a time to help you better understand your pension. Our second instalment focuses on ‘saving’, what this means in relation to your pension, and how it can help you take control of your financial future!
Auto-enrolment
This is a government initiative designed to help more people save for retirement. If you’re eligible, your employer must automatically enrol you in a workplace pension scheme. You have the option to opt-out if you wish.
Compound interest
This is when the interest you earn on your savings starts earning interest itself. The longer your money stays invested, the more time there is for compound interest to boost your savings.
Contributions
These are the payments you and/or your employer make into your pension account. They are usually a percentage of your salary but can also be a fixed amount. There are several different ways you can make contributions which include:
Additional Voluntary Contributions: these are extra payments you can choose to make on top of your regular pension contributions.
One-off contributions/bonus sacrifice: you can make lump-sum payments into your pension, such as your annual bonus, which could lower your taxable income.
Salary sacrifice: this is where you give up part of your salary in exchange for pension contributions, lowering your taxable income.
You may be able to make some or all of your contributions in these ways, but it’s worth checking your member booklet and talking to your employer.
Opting out
Opting out of a workplace pension scheme means you’re choosing not to save for retirement through your employer’s scheme. While this gives you more money in your take-home pay in the short term, it could mean missing out on contributions from your employer and tax relief so it’s important to weigh up the long-term benefits against the immediate gain.
Tax relief
This is one of the perks of saving into a pension. It means that some of the money that would have gone to the government as income tax is redirected into your pension account. For example:
Let’s say Sam earns a pensionable salary of £2,500 a month (£30,000 a year). They contribute 9% (£225) every month into their workplace pension and their employer pays in 5% (£125) every month. Due to tax relief, Sam’s contribution of £225 only costs them £180 (80%) as the government adds £45 (20%) in basic rate tax relief. That’s a total of £350 into Sam’s pension account for only £225, which reduces Sam’s take-home pay by only £180 due to tax relief.
The above example is based on a basic rate taxpayer. Higher or additional rate taxpayers usually get more tax relief.
Don’t hesitate to contact us with any topics you’d like to know more about! We’re here to help and want to provide information that’s tailored to you.