How to top up your work pension for easy investing with a tax relief boost
If you are new to investing, and feel lukewarm or cautious at the prospect, an easy option open to many people with a work pension is to top up investments already held in their retirement fund.
The benefits include convenience, free cash top-ups and potentially lower costs, although you need to be prepared to shut your money away until you are 55 (or 57 from April 2028 onwards).
We look at what to expect when you contact your work pension provider about paying extra into your fund, and some other issues to consider below.
The process does vary so you will need to go online or contact your provider direct for their specific requirements for making payments - but here are the rules and the basic steps to follow.
Top up your pension or an investing Isa? What to consider
Our pensions columnist, former Pensions Minister Steve Webb, discusses the advantages of opting for a pension over a stocks and shares Isa here.
He identifies the upsides as: Government and employer top-ups; the opportunity to withdraw a 25 per cent tax-free lump sum when you decided to retire; and lower investment charges which are capped at 0.75 per cent on 'default' funds and can be even lower.
But Webb, who is a partner at pension consultant LCP, cautions: 'The one big advantage of an Isa is that you can get at your money straight away.
'If you already have separate money set aside for "rainy days" or emergencies, then you may be happy to lock up your additional savings in a pension.
'But it is important not to leave yourself so stretched for short-term savings that if you had an unexpected cost to meet you would have to turn to potentially high cost credit rather than use your rainy day savings.'
Ray Black, managing director of Money Minder Financial Services, took an in-depth look at pensions versus Isas here.
He says: 'The answer comes down to whether you want tax relief on what you save now and to potentially pay tax on income payments later (pension) or to forego the tax relief now and enjoy tax-free withdrawals later (Isa).
Both options have benefits and your best choice will depend on your personal circumstances and priorities.
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What are the rules on paying extra into your pension?
You can typically pay a total equal to your salary up to a maximum of £60,000 a year and get pension tax relief - a top-up from the Government - though this tapers down to £10,000 for higher earners. This is known as the annual allowance.
How pension tax relief works is that you receive rebates on contributions paid into your pension, based on your income tax rate of 20 per cent, 40 per cent or 45 per cent.
These take you back to the position you were in before income tax.
The annual allowance includes your own and your employer's contributions into a pension, and the tax relief itself.
One very important perk of the annual allowance is that you can still benefit from any of it left unused over the three previous tax years, under certain conditions.
It's also important to make sure you are getting the maximum possible advantage from free employer contributions into your pension - not just tax relief from the Government - if you decide to pay in extra.
You could do this by increasing the percentage you pay in each month, as many employers will then match it.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, says: 'While many employers contribute at auto-enrolment minimums, there are others who will offer an employer match – this is where they will match your increased contribution up to a certain level.
'Over time this can give your pension planning a significant boost so it’s well worth investigating if your employer offers it.
'If you’ve got a bit more spare cash, you can also look at making a one-off larger contribution to your pension. You might find it becomes possible if you have received any windfalls or inheritances.
'Making such a contribution – even as a one-off - can have a significant impact on your retirement planning and if left invested for several years could leave you with a much larger pension than you otherwise would have.'
Getting started - log onto your work pension account
It is sensible to do this first, although not all providers will allow you to pay extra contributions online and it is fairly likely you will have to phone up.
Setting up online access will require some basic details, like your pension account number (available from your employer if you can't find it), name, date of birth, and possibly your National Insurance number. You might also need to go through identity checks at this stage.
If you haven't done this before (or recently) it will be a useful starting point to go online and look at how much you have saved into your pension so far, where you are invested at present, and what other investment funds are available.
Many people stick with their 'default' pension fund. However, a 'walled garden' of other funds is usually available, though you should check the charges as they may be higher.
You can also check what percentage of your salary you are currently paying in, and whether you can increase this to get higher matched contributions from your employer, in addition to the tax relief top-ups from the Government, as explained above.
If you have not yet maxed these out, you may be able to adjust the percentage of your salary you pay in online, or you can contact your employer about doing it.
Spare savings? An option open to many people with a work pension is to top up investments already held in their retirement fund
Phone up if necessary - and be prepared for ID and credit checks
You might be able to pay in via your employer, and if so you would have to follow whatever process they have in place.
If you contact your pension provider, they will ask for some personal information from you to carry out checks and process the transaction.
For an identity check, you might need your National Insurance number, date of birth, first line of your address and postcode, and employer information.
You will have to find out your pension scheme's bank details, and give your own bank details so your firm will know where your contribution is coming from. You might also have to give a fairly exact time and date of when you intend to make a payment into your pension.
Your pension firm will probably want to do a credit check on you, and a money laundering check to ensure your pension contribution has come from a legal source.
Pension providers assure us that once you have got through the process of making your first personal contribution, it will be quicker and easier to make future ad hoc payments into your pension.
Does your employer offer salary sacrifice?
Salary sacrifice schemes are a nice little earner for many workers and their employers, because they are essentially a legal way to dodge National Insurance payments.
Employers allow staff to take a supposed 'pay cut', but the money gets ploughed into their pension or put towards some other benefit like childcare instead, and both sides pay less NI as a result. We explain how salary sacrifice works here.
Will a pension contribution breach your annual allowance?
The usual £60,000 limit is explained above and you should check you don't go over it, as if you do HMRC will claw back the tax relief you received.
Meanwhile, you can use up unused annual allowance from the three previous tax years, under certain conditions.
You need to have been a member of a pension scheme during the years you intend to 'carry forward' annual allowance from, although you don't need to have paid anything into it.
That often catches out people, such as the self-employed, who have neglected retirement planning and are trying to build up a pension from scratch.
You must also use up your entire annual allowance first for the year in which you want to do carry forward, and you have to go back to the earliest of the three years and use up the allowance from then first.
Could you benefit from consulting a financial adviser?
If your finances are complicated or you are well off you might find it worthwhile to contact a financial adviser to ensure you are taking full advantage of tax allowances and your pension.
It can be tricky finding the right firm, so we have partnered with Flying Colours to help people find an adviser. It specialises in financial lifestyle planning and helping people to find high quality trustworthy advice from local IFAs.
