What pension questions do I ask my new employer?

Becky O’Connor: Employers looking to attract talent often offer more than the minimum pension contributions

Becky O’Connor is the head of pensions and savings at Interactive Investor.

Think of pension as a deferred salary increase and you will soon pay more attention to the offer of a potential new employer.

The minimum contribution may be 8 percent of salary — including your own payments plus supplements — but some employers are much more generous, and the total contributions from some workplaces exceed 20 percent of salary.

Over a lifetime of income, this extra can mean the difference between a reasonable basic pension and a comfortable pension when you stop working.

According to our calculations, someone who starts working with a typical graduate salary of £25,000, wage increases of 1 per cent per annum, investment growth of 2.5 per cent above RPI inflation and pension contributions of 8 per cent would retire at £186,000 at 68- age.

This adds up to £464,000 with a total contribution of 20 per cent a year over working life – a huge difference of £278,000.

If you’re lucky enough to choose between jobs with similar salaries, the generosity of a retirement can change it for you.

Here’s what to think about and ask your prospective employer’s recruiter or HR team before deciding on a job offer.

1. Matching contributions

The minimum contribution for automatic enrollment including employee and employer contributions, as well as tax relief, is 8 percent.

But employers looking to attract talent often offer more and some schemes offer maximum employee/employer/tax reductions of more than 20 percent.

Most of the time, though, you need to contribute more of your paycheck to get the most out of an employer.

Ask a potential future employer to what level they will match or ‘double match’ with your own contributions.

An example of matching is that you contribute 5 percent and your employer 5 percent. Double matching would mean that you put in 5 percent, including tax credit, and your employer contributes 10 percent.

Please note that all pensions allow you to increase your contributions up to the annual allowance – normally £40,000, but there are other rules for very high earners – or your maximum income if it is lower.

This also applies if the employer does not continue to top up your premium.

Keep in mind that your employer contributions and government tax deductions count toward your annual allowance.

Who pays what in pensions?  Automatic registration minimum contributions for staff and employers, plus the government grant (Source: The Pensions Advisory Service)

Who pays what in pensions? Automatic registration minimum contributions for staff and employers, plus the government grant (Source: The Pensions Advisory Service)

2. Pension plan

Ask what kind of retirement plan your potential new workplace offers. Chances are it’s a ‘defined contribution’ pension – so you know what you’re putting in, but what you get out of it will depend on investment performance.

But if you take a job in the public sector, that could be a “defined benefit” pension. When you retire, you will receive an income based on your salary when you worked.

The latter are now less common, but generally more generous.

3. Tax Reduction

See which tax reduction you receive on your premiums. Taxpayers with a basic rate receive a 20 percent tax reduction.

If you will earn more than the higher tax threshold of £50,270 you can receive a 40 per cent deduction on the contributions, and if you earn more than £150,000 you are entitled to a 45 per cent tax deduction on the contributions.

Likewise, the way tax credits are applied to your work pension can make a difference to your net pay and how much goes into your pension pot.

In particular, it may be relevant whether the scheme concerns ‘deduction at source’ (after tax) or ‘net salary’ (before tax).

For lower earners in net pay plans, people earning below the £12,570 personal deduction threshold will not get a tax credit as they pay no income tax. With ‘deduction at source’ they still receive a tax reduction.

For higher incomes, if you’re in a ‘withholding deduction’ scheme, you may need to claim tax credits above the base rate through your tax return – a bit of extra hassle.

Ask your employer: generous supplements can more than double your pension fund over a working life

Ask your employer: generous supplements can more than double your pension fund over a working life

4. Responsible investing

If responsible investing is important to you, ask whether your company pension offers sustainable or green investments, either in the default fund – the fund you automatically subscribe to when you participate in a plan – or in funds of your choice.

STEVE WEBB ANSWER YOUR RETIREMENT QUESTIONS

The way pensions are invested through large employment schemes can have an impact on the planet, as they can be invested in fossil fuels or, more advantageously, renewable energy.

5. Salary Sacrifice

Many employers now offer a ‘salary offer’, which reduces both the employee’s and the employer’s national insurance contributions.

That may become a more pressing concern for workers after the introduction of the new health and social care levy, which will add 1.25 percent to NI contributions from April.

Salary sacrifice means that you agree to give a portion of your income in exchange for a higher pension premium.

This can have other implications — for example, it may lower your salary in mortgage affordability calculations — so it’s important to understand before agreeing to declare salary in this way.

6. Your own Sipp

If you are an experienced and confident investor, you may want to consider whether your employer agrees to pay your pension contributions in a Self-Invested Personal Pension (Sipp) so that you can choose how you invest your own pension.

Some employers do offer this, and it can be a good option if you want access to a wider range of mutual funds and want full control over where your pension is invested.

7. Bonus Exchange

Find out if you have a chance of winning a bonus and consider whether you can afford to invest it in a pension.

‘Bonus Exchange’, where your bonus is deposited directly into your pension, can result in a significantly lower income tax and NI bill.

If doing so would exceed your annual allowance of £40,000 (or maximum earnings, whichever is lower) in a tax year, consider using ‘transferable’, which allows you to use unused allowance from the previous three tax years.

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