Key Takeaways:
- Reviewing your current contributions regularly and adjusting them as your income grows is a key step in staying on track with your retirement goals.
- Contributing even small additional amounts to your pension early can have a significant impact over time due to the power of compound growth.
- Factors like your financial priorities, short-term goals, and life stage should guide your decision, and tools like a Self-Invested Personal Pension (SIPP) can help supplement any workplace pensions you have.
Had a pay rise, a generous bonus, or recently discovered your employer’s salary sacrifice policy at work? These are all helpful bumps up in your financial planning.
If you’re already at a place where your debt-to-income ratio is very manageable and you have saved an emergency fund, thinking about adding more to your pension each month may be a significant step to enjoying the financial security you currently feel — but on a longer-term basis.
This article will help you weigh up whether increasing pension contributions is right for you, how much you can contribute, and how to increase yours if you decide it’s right for you.
Jump to:
- How do pension contributions work
- Should I increase my pension contributions?
- How much can you contribute to a pension?
- How do I check my pension contributions?
- How do I increase my pension contributions?
- Deadline for pension contributions
- Summary
How do pension contributions work?
So, how do pension contributions work? Well, if you have a workplace pension through your employer, there will automatically be at least 8% of your wage being put into the pension pot each month (if you’re eligible and earning over the threshold).
Under the pension ‘auto-enrolment’ rules, the legal minimum for workplace pensions is 8%, with the employer covering 3% of that themselves, and in that example, the remaining 5% comes out of your own wages.
Some employers may even offer more generous policies where they might match what you contribute up to a maximum amount.
Or there may be a salary sacrifice option available at work where you take a lesser salary on paper but more goes into your pension each month.
For people who are self-employed, they wouldn’t have access to an auto-enrolment style workplace pension. However, an alternative would be to set up a private pension pot (something like a Self-Invested Personal Pension, or ‘SIPP’ for short) and aim to contribute enough to meet their retirement needs later on in life.
Should I increase my pension contributions?
Deciding whether to increase your pension contributions is a personal choice that depends on your unique circumstances. There are many benefits, such as:
- compound growth,
- tax relief,
- potential employer matching,
- and the possibility of retiring earlier/more comfortably.
However, it’s important to weigh the cons too — like needing cash flow flexibility or to prioritise other financial goals, such as saving for a home or paying off high-interest debt.
Consider your current situation: are you at a stage in life where flexibility is key? If you have short-term goals such as saving for a property or a wedding, or planning to start a family, where do your pension contributions fit into this?
Every life stage – whether you’re 25, 35, 45, or 55 – comes with its own considerations. If you’re unsure of what’s best to do, speaking with a financial adviser could help you make the best decision for both your short and long-term future. (Wealthify doesn’t give financial advice.)
How much can you contribute to a pension?
For most people, the pension annual allowance is £60,000 (or effectively, 100% of your annual income, whichever of these two figures is lower).
For very high earners, you may face some tapering of this £60,000 allowance. But this only needs to be considered if you’re earning over £200,000 a year.
If you have a significant surplus of money that you’d like to contribute to your pension as a one-off (over the maximum amount), it may be possible to carry forward some unused pension allowance that you haven’t used in the past three tax years. However, this can be quite complex, so it would be advisable for you to speak to a financial adviser in that instance.
How do I check my pension contributions?
Probably the easiest way is to look at your payslips, but this only gives a glimpse into how much is going into the pot.
If you want to see its current total, or the projection of what it would be when you reach retirement age, you’re better off logging into your pension schemes website and seeing what it says, or getting your annual pension statements out.
You could also ask your HR or Payroll team for a hand if you want to understand the percentage your employer is contributing.
How do I increase my pension contributions?
Increasing your pension contributions is simpler than you might think.
Start by contacting your HR or payroll team — they can guide you on adjusting your workplace contributions. If your employer offers an online portal, changes may be manageable there instead.
You could also set up personal contributions to boost your savings (you could consider opening a Self-Invested Personal Pension to do this). This is an alternative option to traditional workplace pension schemes if you’re self-employed, too.
There’s even the option to opt in for a tax relief of 25% with Wealthify’s Personal Pension. This means that even if you are employed and pay into a workplace pension, contributing to a private pension (like this one) after you’ve paid tax through your employer shouldn’t mean you’re paying it twice. Instead, you’ll effectively be reimbursed for that tax you already paid.
Additionally, salary sacrifice schemes can be an effective way to save on tax while increasing your pension pot. You could speak to your HR team about this too to see if it’s an option!
Deadline for pension contributions
The annual allowance deadline for adding money to your pension falls in line with the tax year-end: the end of April 5th.
However, some employer schemes may follow the end of their pay year (and it’s best to speak to your payroll team to confirm this). Also, don’t forget to account for payroll processing times — planning ahead can help you avoid missing out!
Lastly, if you’re planning to carry forward unused allowances from previous years, be sure to check the rules and decide whether you’ll need to act before the end of tax year deadline.
Summary
Increasing your pension contributions could offer significant benefits, such as tax relief, employer matching, and long-term financial growth.
However, the decision depends on your personal circumstances, including your income, financial priorities, and life stage.
- Keep in mind how much you could feasibly afford to contribute;
- Explore ways to increase your contributions;
- And keep an eye on key deadlines, while also keeping in mind that you won’t be able to withdraw the funds again until retirement age.
If you’re unsure about the best approach to take, consider putting aside some money to speak with a financial adviser. If you haven’t done this before, it could be worth the money to guide you on your much wider financial journey towards a more secure retirement.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
Wealthify does not provide advice. If you’re not sure whether investing is right for you, please speak to a financial adviser.
