Investing

What pension questions should I ask my new employer?

Becky O’Connor: Employers hoping to attract talent often offer more than the minimum pension contributions

Becky O’Connor is head of pensions and savings at Interactive Investor.

Think of a pension as a deferred pay rise and you will soon start to pay more attention to what is on offer from a potential new employer.

The minimum contribution may be 8 per cent of salary – including your own payments plus top-ups – but some employers are far more generous, and total contributions from some workplaces equal more than 20 per cent of salary.

Over a lifetime of earnings, this extra can mean the difference between a reasonably basic retirement and a comfortable one when you give up work.

According to our calculations, someone starting working life on a typical graduate salary of £25,000, receiving pay rises of 1 per cent a year, investment growth of 2.5 per cent above RPI inflation and pension contributions of 8 per cent would retire with a pot worth £186,000 at age 68.

This rises to £464,000 with a total contribution of 20 per cent a year throughout working life – a massive £278,000 difference.

If you are lucky enough to be choosing between jobs with similar salaries, then the generosity of a pension may swing it for you.

Here’s what to think about and ask the recruiter or HR team at your prospective employer before you decide on a job offer.

1.  Matching contributions

The minimum auto-enrolment contribution including employee and employer contributions, as well as tax relief, is 8 per cent.

But employers hoping to attract talent often offer more and some schemes offer maximum employee/employer/tax relief in excess of 20 per cent.

However, you will usually need to contribute more of your salary in order to get the maximum from an employer.

Ask a potential future employer up to what level it will match or ‘double match’ your own contributions. 

An example of matching is you contribute 5 per cent and your employer contributes 5 per cent. Double matching would mean you put in 5 per cent, including tax relief, and your employer contributes 10 per cent. 

It’s worth remembering that with all pensions, you can increase your contributions up to the annual allowance – normally £40,000, but there are different rules for very high earners – or your maximum earnings if they are lower.

That applies even if the employer doesn’t continue to match your contributions.

Note that your employer’s contributions and government tax relief count towards your annual allowance.

Who pays what into pensions? Auto enrolment minimum contributions for staff and employers, plus the Government top up (Source: The Pensions Advisory Service)

Who pays what into pensions? Auto enrolment minimum contributions for staff and employers, plus the Government top up (Source: The Pensions Advisory Service)

2. Pension scheme

Ask what type of pension scheme your potential new workplace offers. The chances are it is a ‘defined contribution’ pension – so you know what you will put in, but what you get out will depend on investment performance.

But if you take a public sector job, it could be a ‘defined benefit’ pension, in which case when you retire you will receive an income based on your salary when you were working.

The latter are less common now but typically more generous overall.

3. Tax relief

Check what tax relief you will receive on your contributions. Basic rate taxpayers will receive 20 per cent tax relief.

If you will be earning more than the higher rate tax threshold of £50,270 you can receive 40 per cent relief on contributions, and if you earn more than £150,000 you are entitled to 45 per cent tax relief on contributions.

Similarly, how tax relief is applied to your work pension can make a difference to your take-home pay and how much ends up in your retirement pot.

Whether the scheme takes ‘relief at source’ (after tax) or is ‘net pay’ (before tax) can be particularly relevant.

For lower earners in net pay schemes, people earning below the £12,570 personal allowance threshold won’t get tax relief, because they don’t pay income tax. With ‘relief at source’, they will still receive tax relief.

For higher earners, if you are in a ‘relief at source’ scheme, you may need to claim tax relief above the basic rate through your tax return – a bit of extra hassle.

Ask your employer: Generous top-ups can more than double your retirement fund over a working life

Ask your employer: Generous top-ups can more than double your retirement fund over a working life

4. Responsible investing

If investing responsibly is important to you, ask if your workplace pension offers sustainable or green investments either in the ‘default fund’ – the one you are automatically signed up to when joining a scheme – or in funds that you can choose yourself.

STEVE WEBB ANSWERS YOUR PENSION QUESTIONS

What pension questions should I ask my new employer?       

The way pensions are invested by big workplace schemes can have an impact on the planet, as they may be invested in fossil fuels, or, more beneficially, renewable energy.

5. Salary sacrifice

Many employers now offer ‘salary sacrifice’, which reduces both the employee and employer’s National Insurance bill.

That may become a more pressing concern for workers after the introduction of the new Health and Social Care levy, which will add 1.25 per cent to NI contributions from next April.

Salary sacrifice means you agree to give up some of your earnings in return for a higher pension contribution.

This can have other implications – for example, it potentially reduces your salary in mortgage affordability calculations – so it’s important to understand this before agreeing to give up salary in this way.

6. Your own Sipp

If you are an experienced and confident investor, you could ask whether your employer would agree to pay your pension contributions into a Self-Invested Personal Pension (Sipp), so that you can choose how to invest your own pension.

Some employers do offer this and it can be a good option if you want access to a bigger range of investment funds and full control over where your pension is invested.

7.  Bonus exchange

Check if you are likely to receive a bonus and consider whether you could afford to invest this into a pension.

‘Bonus exchange’, where your bonus is paid directly into your pension, can result in a significantly reduced income tax and NI bill.

If doing so would take you over your annual allowance of £40,000 (or maximum earnings, if lower) in a tax year, consider using ‘carry forward’, which allows you to use up unused allowance from the previous three tax years.

TOP SIPPS FOR DIY PENSION INVESTORS

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