You may have heard that contributing to pensions is one of the best ways to save for your retirement and build wealth, but do you know why this is? The key lies with the fact they are made pre-tax, meaning the amount you receive in your pension is far more than you have had to give up in take-home salary. They are particularly powerful for higher and additional rate taxpayers given the higher rate of relief available. If you choose to make contributions via salary sacrifice, you effectively give up your salary to make a pension contribution meaning that not only is the contribution made pre-tax, but also before national insurance and student loans which lower the cost of investing into a pension even more. As Phoenix, your employer, also saves employer’s national insurance if you make the contribution via salary sacrifice, they add their saving (13.8%) onto your contribution too.
So your contribution to a pension, attracts free money from the government and free money from Phoenix.
To pay £100 into a pension will cost you:
|Tax Bracket||Via Payroll||Via Salary Sacrifice|
|Basic rate tax payer||£80||£68|
|Higher rate tax payer||£60||£58|
|Additional rate tax payer||£55||£53|
Pension contributions are also particularly valuable if your earnings fall within two ranges. The first is between £50,000 and £60,000 assuming i) you have children and ii) your partner does not earn more than this. This is because if either you or your partner’s income is over £50,000, 1% of child benefit is lost for every £100 of income over this amount. Pension contributions can reduce your income below this amount and reclaim some (or all) child benefit and you are therefore getting greater tax relief than usual.
The other place where this applies is if your income is over £100,000. Once your salary passes £100,000, you begin to lose your personal allowance at a rate of £1 lost for every £2 your income is in excess of £100,000, until the personal allowance is fully lost at £125,140. Making pension contributions can bring your income below £100,000 and reinstate the personal allowance, which means your pension contributions are effectively providing you with 60% tax relief within this range.
The final point on pension contributions is that all employers are required to contribute to their employee’s pensions under government legislation (except under very specific scenarios). Phoenix offer a very generous 10% contribution assuming a 2% contribution from you, and also offer an additional 2% with another 2% contribution from you. That means that you can end up with 16% in your pension with only a 4% contribution from you, and not contributing to your pension at all is effectively taking a pay cut of 10%!