Obviously the more you pay into a pension, the more money you will have in retirement. However, there is more to consider when thinking about your pension contributions.
It’s important to understand how different levels of pension contributions will affect your income.
Effectively, you’re swapping disposable income now, in exchange for a future retirement fund, so you need to budget carefully.
If you have a workplace pension, there will be a minimum amount you have to contribute. In April 2019, the minimum is going to rise from 5% to 8% of qualifying earnings. The employer must pay 3%.
In an ideal world, you should put more than this in if you can. However, if you have debt it might be better to clear this first before paying into a pension.
Only you will know how much you can afford. But the more you pay in the earlier, the more money you will have for retirement. The Money Advice Service’s pension calculator can be a useful tool to help you work out what you’ll need in the future.
If you pay your pension contributions via salary sacrifice you will also save the National Insurance due on that income.
So, if you are a basic rate tax payer, you’ll save the income tax at 20%, plus avoiding your 12% National Insurance contributions (for employees) on the amount you sacrifice. So, for every £68 you sacrifice from your salary, £100 will go into your pension fund.
If you are a higher rate tax payer, choosing to make your pension contributions through salary sacrifice means you don’t have to claim back your extra tax relief and you don’t have the 2% NI deduction either. To get £100 into your pension as a 40% tax payer, you only have to lose £58 from your take home pay.
The amount of pension contributions you make each month could also affect other things. Mortgage applications or other benefits you might be entitled to, such as statutory maternity allowance.
It’s therefore important to consider fully the effects of any changes in your take home pay.
Don’t put off making pension contributions though. The sooner you pay into a pension the more time your pension pot has to grow.
If you need help trying to work out the best way to pay into your pension, don’t hesitate to get in touch. Our qualified financial advisors will be able to help you make the most of your money, now and in the future.