Payments made into a pension are called contributions. With a workplace pension, like The People’s Pension, contributions normally come from three sources: the employee, the employer and the government. As an employee, you can always increase your pension contributions if you want to.
How do pension contributions work?
Payments made into a pension are called contributions.
When an employer automatically enrols an employee into a pension (like The People’s Pension), by law there are set minimum contribution levels.
These contributions are completely separate from the State Pension which, at £9,110.40 a year or £175.20 a week currently (based on someone reaching State Pension age on or after 6 April 2016 with a full National Insurance record), is likely to need topping up for most to enjoy a more comfortable retirement.
Benefits of paying into your pension pot
If you stop your contributions, your employer may also stop paying in too.
Did you know? Research from the Money Advice Service shows that the maximum basic State Pension is far below what most people hope to retire on.
State Pension is currently around £175.20* a week – could you manage on that alone?
Here are some benefits of a workplace pension:
- Your workplace pension gives you your own pension that belongs to you – even if you leave your job in the future, it’s yours to keep.
- Each pay period when you pay into it, your employer does too and the government lets you hold on to some of your tax to help you build a bigger pot. That’s free ‘extra’ money, meaning more saved towards a more comfortable retirement. Here’s an example** if you were paying in contributions of £40 per month:
- Your workplace pension pot is completely separate from the State Pension, and a good way to top up your retirement income.
- The return on your pension savings is likely to be better than from any savings in your bank account. So it’s wise to start saving now to give your money a better chance to grow!
- If you stop your contributions your employer may stop paying in too. So, don’t lose out.
*The State Pension amount of £175.20 a week is based on someone reaching State Pension age on or after 6 April 2016 with a full National Insurance record. Find out more about different types of pension
**The example in the table above shows what happens when contributions are made after tax, and tax relief is claimed for you. Higher rate and additional taxpayers may need to claim further tax relief through their tax returns. The calculation will differ where contributions are made before tax has been taken and tax relief is received automatically. Find out more about tax relief
Check what’s in your pension pot
You’ll receive an annual statement in your Online Account showing the value that you hold in The People’s Pension.
But you can check, any time, how much is in your pot by logging in to your Online Account. This will help you keep track of how your investments are doing and give you an idea how much you might have when you retire.
Check how much you need to save for retirement
Use our calculators to check how much you’ll need:
Our life expectancy calculator can give you an idea of how long your pension savings will need to last.
Our future budget calculator can help you check whether you need to save more into your pension to cover your costs in retirement – and if so, how much.
Paying more into your workplace pension
If you can afford to, you should think about saving more.
The more you pay in the more tax relief you may receive* and the more money you could have later on in life. Plus:
- the return on your pension savings is likely to be better than from any savings in your bank account
- your workplace pension pot is completely separate from the State Pension
- your workplace pension gives you your own pension that belongs to you – even if you leave your job in the future.
*There are limits on how much you can save each year and receive tax relief on your contributions. The maximum is 100% of your UK earnings (up to the annual allowance) or £3,600 gross, whichever is higher.
How to increase your pension contributions
If you want to increase your payments, talk to your employer first to see if they can set up the extra payments on your behalf.
This makes saving more for your retirement even easier.
If your employer cannot do this for you, you can make personal payments into your pension by Direct Debit or by a lump sum payment through your online banking (sometimes called BACS).
You can always reduce your pension contributions back to the minimum amounts if things change and you don’t have enough spare cash each month.
Maximum pension contributions
Under HM Revenue & Customs (HMRC) rules there is a limit on the total amount you can save each tax year into all registered pension schemes and the tax relief you receive on your contributions. The maximum is 100% of your earnings (up to the annual allowance) or £3,600 gross, whichever is higher.
The annual allowance limit for the current tax year is £40,000. This limit includes all your contributions, tax relief and employer contributions across all your pension arrangements. If you go over this limit, this will result in a tax charge, known as the annual allowance charge.
If your workplace pension is your only source of income when you retire, apart from your State Pension, and you and your employer are only paying the pension contributions required by law, it’s quite likely this won’t be enough for a comfortable retirement.
Employer pension contributions
As an employer, you’re required to contribute to your employees’ pension pots on a regular basis, from the date your auto-enrolment duties start. So how much do you need to pay currently?
How much do you need to pay?
The level of contributions that needs to be paid is usually* based on your employees’ qualifying earnings and the relief at source tax basis.
You don’t pay anything on the first £6,240 they earn a year, or on anything they earn above £50,000 a year. What you do pay is at least 3% of any earnings in between those two figures.
So, if they earn £16,240 a year, you have to pay at least 3% of £10,000. These payments are known as ‘contributions’ and a minimum contribution amount is set by the government each year.
*Some employers use a different earnings basis though – such as pensionable earnings or total earnings.
Minimum pension contributions
As an employer, you have to make the ‘Employer minimum contribution’ shown below, and then the total contribution is reached by adding the employee’s contribution (deducted from their earnings) and tax relief from the government.
However, if you wish you can choose to pay the full amount yourself, so your employees don’t have to.
|Employer minimum contribution||Employee contribution||Tax relief on employee contribution||Total minimum contribution|
|Until 5 April 2019||2%||2.4%||0.6%||5%|
|6 April 2019 onwards||3%||4%||1%||8%|
These percentages can vary if an employer calculates contributions using different elements of pay. You can find out more about calculating pension contributions on The Pension Regulator website.
Tax and pension contributions
To help employees save for retirement, the government usually provides tax relief on the contributions they pay into their pension savings.
Tax relief is available on employee’s pension savings up to a standard limit known as the annual allowance, but their exact annual allowance depends on how much they earn.
Employers need to check that they’ve applied the same tax relief settings to their employees’ pension contributions on their payroll and on your pension scheme.
Your pension contribution options with The People’s Pension
There are two ways you can sign up for The People’s Pension, which have different approaches to paying into employee pension pots.