Welcome to BuyAssociation.co.uk

Topping up your company pension - Sarah Pennells, SavvyWoman.co.uk

Topping up your company pension

Joining a company pension scheme is a good start to your retirement planning, but you may need to make extra payments to ensure you can afford the lifestyle you want.

Many people who join their employer’s pension scheme breathe a huge sigh of relief once they’ve done so – not least because they never have to think about pensions again. But – I’m afraid – it’s not necessarily that simple. Joining your employer’s pension scheme is definitely a great step in the right direction, but you may need to top up your pension if you started saving late or the pension scheme isn’t very generous.

Why topping up makes sense
Most people who reach retirement age find they haven’t been able to save enough – there are very few people who end up with more money than they needed or wanted when they reach retirement age!
You don’t have to save extra for your retirement through your pension – you could put the money into a savings account or into an ISA (individual savings account). The advantages of paying extra into your company pension scheme are that:

a) you receive tax relief on money you’ve paid in. Currently, for every £100 you pay in, the actual cost to you is only £80 if you’re a basic rate taxpayer and £60 if you pay tax at 40%. If you earn more than £150,000 a year your tax relief is gradually reduced so that those who earn £180,000 a year or more only receive 20% tax relief.

b) your employer may make contributions on your behalf or pay the costs and charges associated with your top-up scheme.

Options for topping up
Every year you should be sent a statement by your employer or pension provider telling you how much you may be due to receive when you retire. Depending on the type of scheme you’re in the statement may be little more than an indication of the pension you will receive, but it should help you decide whether you need to top up your pension and, if so, how much to pay in.
There are likely to be several choices when it comes to making extra payments:

• Added years. If you’re in a final salary (otherwise called a ‘defined benefit’) scheme, you may be able to buy added years membership of the pension. This is a great option because it means that when you retire you’ll be treated as though you’ve been in the pension scheme for longer than your working years.

• AVC or additional voluntary contribution. AVCs are pension top ups offered by your employer. They don’t have the same guarantees as buying added years in that the amount you receive at retirement will depend on how well the AVC fund you’ve invested your pension money in has performed. There are pros and cons to using your employer’s AVC scheme. The main advantage is that your employer may subsidise them in some way, either by making contributions on your behalf or by paying some or all of the charges. The disadvantage can be that your choice of investment funds may be limited.

• Stakeholder or personal pension. If you prefer, you can take out a stakeholder or personal pension to run alongside your employer’s pension scheme. It’s not the right route for everyone and it’s not recommended if your employer makes a contribution to AVCs or added years on your behalf (see above).

TIP: There are circumstances when it might be in your interest to take out a stakeholder or personal pension. For example, if your employer’s AVC scheme has a limited range of investment funds or you think you’ll be switching jobs on a fairly regular basis and you wouldn’t be giving up employer contributions or subsidised charges. Take advice from an independent financial adviser if you’re not sure.

Sarah Pennells

SavvyWoman is the brainchild of Sarah Pennells, who's a well known personal finance journalist and broadcaster. Sarah has appeared regularly on BBC Saturday Breakfast and writes for several magazines. (photo: Simon Brown)

More pages

Page 1: Topping up your company pension

Get Your Website On The First Page Of Google On A Budget FREE website health check and white paper on SEO in a recession

Free ink cartridge click here new customers can order an ink cartridge for £0

Document sharing - share, edit and save documents Secure document collaboration made easy!

Click here for a free consultation - make foreign exchange work for you

Free delivery on office supplies everything from stationery to office furniture