How to maximise pension benefits from your employer
Under auto enrolment virtually all employers have to offer pension scheme membership to most, if not all, of their staff. There are large penalties for those employers who a) do not offer an auto enrolment pension to their staff and b) who break the rules wittingly or unwittingly.
Even if you opt out of your pension scheme you will be automatically re-enrolled into it after 3 years. There are only rare circumstances when you would even consider opting out of an employer’s pension scheme.
The advantage to you of joining such a pension scheme is that your employer has to pay 3% of your pensionable earnings into your pension scheme. You have to pay 5%. This may sound like a lot but it isn’t really when you think about it.
For starters you get 3% employer contributions for free. What’s more it is a tax free benefit in kind. You get tax relief on your pension contributions. If you are a basic rate taxpayer that means the net cost to you is 4% (5% x 0.8) and if you are a higher rate tax payers the net cost to you is 3% (5% x 0.6). This means that a basic rate tax payer’s net contributions double immediately from 4% to 8% which is equivalent to a 100% investment return instantly. A higher rate tax payer’s net contributions increase from 3% to 8% immediately which is equivalent to a 167% investment gain straight away.
These returns are significant and not to be sniffed at but guess what? You can extract even greater returns from your employer under two other ways.
Some employers will match their employees’ pension contributions usually up to a maximum amount such as 7% or 10% for example. If your employer offers this benefit then grab it with both hands. Remember employer pension contributions are a tax free benefit in kind and most importantly they are free. The only downside is if you genuinely cannot afford to take up your employer’s generous offer. Even if your employer doesn’t already offer matched contributions you can always ask them to do so. After all, if you don’t ask you don’t get.
If your employer offers salary sacrifice then again seize the opportunity. Salary sacrifice means that you give up some of your salary for the equivalent amount to be paid as employer contributions into your pension scheme instead. The advantage to you is that most employers are willing to give up a portion, if not all, of the employer’s National Insurance saved, usually up to 13.8% of your salary, and pay that amount into your pension scheme instead. Again this is a very generous tax free benefit of your employer.
Do be aware though that a reduction in your salary could have a knock on disadvantage to you when applying for a mortgage or claiming state benefits because your official salary will be lower. You would also of course benefit from saving on average 12% NIC personally on the salary you have sacrificed because NIC isn’t payable on pension contributions. Even if your employer doesn’t offer salary sacrifice currently you can always ask for it to be provided as a tax free benefit in kind. After all it won’t cost your employer anything apart for some administrative time which can be paid for by your employer retaining some of the employer’s NIC saved! So it is potentially a win:win situation for employer and employee.
So do take up this opportunity if you are eligible to join an employer’s pension scheme. You know it makes sense.