As a new year begins and with it, new resolutions are made, PensionBee, a leading online pension provider, has identified four pension priorities for 2024 that could make 2024 a happy new year for your pension and ultimately help grow a bigger retirement fund.
1. Get to know your pension: the type of scheme and how the tax relief is added
It’s important to understand the type of pension you have from previous jobs and the one you are paying into now, as there can be implications for planning and for tax.
Is your pension defined benefit or defined contribution?: Defined benefit schemes pay out a set amount based on earnings. They are common in the public sector and more rarely, still offered by some large private employers. Defined contribution schemes, which are now far more common, build up based on your and your employer’s contributions to form a ‘pot’ you can eventually access for retirement.
Each type comes with its own advantages and disadvantages and can affect how you plan for retirement. For instance, if your scheme is defined contribution, it’s important to know how much you are contributing, how much your employer is adding and what the maximums are, to ensure you are making the most of what’s on offer.
Are your contributions made via net pay, relief at source or salary sacrifice?: Not all pension contributions are made in the same way by all employers and providers. The method used will depend on what your employer has set up and there are different tax implications for each. With net pay schemes, the amount of tax you owe is calculated after your pension contribution is taken from your pay.
With relief at source, your pay is taxed as normal, your pension contribution is taken out after you have been taxed and your provider claims basic rate tax relief on your behalf and adds this to your pension.
Higher and additional rate taxpayers using relief at source schemes must claim their extra tax relief themselves, via their tax returns. PensionBee found that higher and additional rate taxpayers left £3.5 billion in unclaimed relief through relief at source schemes between 2016/17 and 2020/21. PensionBee has a tax relief calculator here.
With salary sacrifice schemes, pension contributions are taken before income tax and National Insurance are calculated, potentially bringing your tax bill down further.
Becky O’Connor, Director of Public Affairs at PensionBee, said: “It’s amazing how easy it is to go through your entire working life without ever actually knowing how your pension works. But not understanding the type of scheme you have or how it works can leave you at risk of missing out on free cash, such as more tax relief or lower tax bills.”
2. Calculate what you are on track for - and whether you need to make any changes
Using a tool like PensionBee’s pension calculator, you can work out what your current pension amount and contributions might add up to by the time you reach your desired retirement age. Consider the Pension and Lifetime Savings Association’s ‘Retirement Living Standards’ - the amounts of income the trade body estimates people will need for different living standards in retirement.
Becky O’Connor, Director of Public Affairs at PensionBee, said: “It’s a good idea to add up how much you already have across different pensions and if they grow by a realistic amount before your planned retirement date, how much you are likely to have when you retire. Then you will know if you can carry on as you are or if you need to think about increasing contributions. Remember that stock market returns can affect your pension outcome too and forecasts are just good estimates based on past performance.”
3. Work out if you can increase your contributions - and if you can, increase them
Increasing contributions by just 1%, or maybe a fixed amount of £50 a month, can make a huge difference to your eventual pension pot. For example: if you earn £30,000 and pay in an 8% monthly contribution, you are on track for an estimated pension pot of £242,846 at retirement assuming 1% salary rises and typical investment growth. If you increase this to 9%, your eventual estimated pension pot goes up to £273,179.
Becky O’Connor, Director of Public Affairs at PensionBee, says: “Marginal gains theory really comes into its own with pensions. Small improvements in your contributions can make a huge difference to your overall pot size when you retire and the earlier in working life you make them, the better, thanks to the power of compound returns.”
4. Not got a pension? Set one up
One for the self-employed in particular, if auto-enrolment has passed you by and you have never managed to start a pension, it’s straightforward to open a personal pension and start paying in.
Becky O’Connor, Director of Public Affairs at PensionBee, said: “Even without employer contributions, pensions are still worth having if you’ve never managed to pay into one before, because the tax relief added to your contributions still provides a significant additional boost to what you pay in. If you are a basic-rate taxpayer, then a contribution of £100 from you is topped up to £125 with tax relief added by HMRC, so you will soon start to see your contributions add up to an impressive amount.”