How does it work?
All this means that, if you haven’t consciously opted out of your workplace pension scheme, some of your salary should be going directly into a savings pot for your retirement – and, even better, you aren’t the only one contributing to your retirement savings. Every time you put money in, the government and your employer put money in too.
When you pay a contribution into your pension savings the government reimburses the income tax you have paid on that money. So, if you are a basic-rate taxpayer and you pay £80 into your pension, the government will add £20 to refund the 20% income tax you paid on that £80. The government contribution is automatically added to your pension by your pension provider, and you don’t need to do a thing as a basic-rate taxpayer.
If you're a higher or additional-rate taxpayer you can reclaim the rest of the income tax you paid via your tax return. This means if you want to pay £200 a month into your pension, you only have to pay in £160, with the government adding the rest. You can find out more about how the government contributes to your pension at GOV.UK
Better still, your employer should also be contributing to your pension. Under the rules of auto-enrolment, you must contribute at least 8% of your salary to your pension, but 3% of that is paid by your employer. So, if you opt-out of auto-enrolment it means you are missing out on extra contributions.
Don't miss out on extra money for your pension
And you could be missing out on even more money from your employer. Research by Royal London found that over three million people working for large businesses are missing out on approximately £2bn a year that their employer has offered to contribute to their workplace pensions. This is because many employers, and particularly larger employers, offer to match your pension contributions above and beyond the legal minimums.
“Millions of workers are missing out on ‘buy-one, get-one-free’ money from their employer in the form of ‘matching’ pension contributions,” said Steve Webb, former Director of Policy at Royal London. “At a time when money is tight for many people and pay rises may be limited, getting your employer to contribute more to your pension can be a very cost-effective strategy.”
It's a good idea to plan ahead and think about how much is necessary to put away to reach your retirement goal. This will help you work out whether you’re on track, or whether you need to be saving more. “Employees need to find out if their employer offers additional matching pension contributions and give serious consideration to increasing their contributions if they can afford to do so,” said Steve.
“Where individuals are thinking about where to put their money to get the best return, the chance to more than double your money through employer contribution and tax relief from the government takes a lot of beating.”
Pensions are complex and their rules change frequently. If you have any concerns or questions about investing in a pension, it's a good idea to seek help from an independent financial adviser.