With the recent ups and downs in the UK economy, it’s normal to feel worried and overwhelmed about your financial situation . Right now, saving for your future self feels like leaving your current self short of money. But before you hit the “stop” button, it’s worth considering the potential impact on your later life. Even a short gap in your pension payments could have a huge impact later. You could miss out on tax relief and employer contributions.
If you’re not sure what this means, don’t worry. This pensions explainer will help you understand the perks of saving into a pension, and what happens if you stop.
It’s not just you contributing, but your employer too
If you are aged over 22 and earning £10,000 or more then you will have been automatically enrolled into your workplace pension scheme. When your employer enrols you into your workplace pension, a part of your salary goes straight into your pension, so there’s nothing you need to do. The great news is that your employer also contributes at least 3% of your salary, and you’ll get tax relief from the government on top.
Your pension contributions explained
Current rules state an employer must pay in a minimum of 3%, which would require you (the employee) to pay in 5% by a reduction in your wages. This makes a total minimum contribution of 8%. Yet this is based on your qualifying earnings, which is after the first £6,240 is deducted.
According to the ONS, the average UK salary was £38,131 for a full-time worker in 2021. Using this salary, you would be paying your 5% contributions on the qualifying £31,891.
Want to know exactly what you are paying in? You can find out exactly what you are contributing every month on your pay slips.
There is technically no limit to how much you can save into your pension. So, if you want to contribute more, you can! Some employers also offer matching contributions. For example, your employer could pay 10% if you pay 10%. This means 20% of your salary goes into your pension, but only costs you 10%. This is a great way to save more, whilst also getting tax relief on your contributions from the government on top.
But remember, there is a limit on the amount of your contributions that will receive tax relief. In the 2022/23 tax year, you can receive tax relief on all your contributions where total contributions (including your employer’s contribution) are no more than your salary, up to a limit of £40,000. However, this will only be up to £4,000 if you have started to take money from certain pensions.
The lifetime allowance is currently £1,073,100, generally this is how much you can take from all of your pension savings before a tax charge will apply.
Tax relief
Tax relief on pension contributions works when some of the money that would have gone to the government as tax, goes to your pension instead. This increases your pension savings with money that you wouldn’t have otherwise received, just for being enrolled into your pension scheme.
Don’t meet the tax relief threshold? Read about our tax top-ups for NOW: Pensions members.
Pension Credit
Could you also be eligible for Pension Credit? Right now, an estimated 850,000 eligible households could be missing out. This is a weekly payment offered to people over state pension age to help ensure a weekly income of at least £182.60 per person. You can check your eligibility on the government website.
Find your lost pension
Did you know that the average person has between 11 and 12 jobs in their lifetime? That could mean 11 or 12 different pension pots. It is really important that you keep track of all of your pots as there is an estimated £19 billion lost from dormant pots.
Do you know where your pension is? Not to worry if you don’t, you can take small steps to find a lost pension.
- We all have that “drawer of shame” with letters and statements from our banks or pension providers. No judgement – but do dig them all out. If you can’t find these statements, write down the places that you have worked (your employers).
- Go to the pension tracing service on the government website, and enter your employer’s name. You’ll then be able to see who the employer’s pension provider was. Download a letter and input your details and send it to the employer’s pension provider.
- Ensure your pension provider has your current address and contact details. If you haven’t received an annual benefit statement in the least year, then ask for one. This will tell you how much your pension is currently worth and what it’s projected to be worth at retirement age.
- To make your pension easier to track, you can move all your pensions under your current workplace scheme. That way, you’ll get regular contributions from you and your employer. If you’re a member with NOW: Pensions, you can combine your pension with these simple steps.
Look out for pension dashboards in the future. The industry is working towards launching pension dashboards which will give you a view of all your pension savings in one place. These may be available as soon as 2024. Great right?
If stopping your pension is still your preferred option…
Stopping pension payments may be a better option for some people right now. Before you stop your pension savings, consider the huge gaps when it comes to retirement. It can be worthwhile to keep saving in the long term, remembering that you currently can’t access this money until age 55 (this rises to age 57 from 2028). At that point, you can take up to 25% of your pension tax-free.
If you do stop paying, think about when you can start paying again and do it as soon as possible. It’s easy. You can speak to your employer when you’re ready.
We hope this explainer helps you understand your pension a little better. It’s OK to feel overwhelmed and worried during these difficult times. What’s important is knowing where your pension savings are and how to keep track, what options you have, and what can happen if you stop your savings. This will help you make the best decision for you.
NP/B0039/10/2022
