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In light of Rachel Reeves’ recent budget announcement, safeguarding your pension assets has become increasingly crucial. The new fiscal policies bring changes that demand close attention.
The Chancellor’s move to levy national insurance contributions on workplace pension salary sacrifice schemes exceeding £2,000 adds another layer of complexity to the pension landscape.
Although this change will not take effect until April 2029, it is projected to generate £4.7 billion in that year, followed by £2.6 billion in the subsequent year.
Financial experts express concern that this added complexity and tax burden might discourage individuals, especially younger generations, from adequately preparing for retirement.
Ali Adam, the co-founder of fintech pension app Chest, commented, “Salary sacrifice is one of the most effective strategies to promote saving. By reducing the tax-efficient contribution limit, it becomes more challenging to save, exacerbating the issue of unfounded optimism that jeopardizes young workers’ financial futures.”
While the Government has allocated resources to a new Pension Commission to address the retirement savings gap, it simultaneously imposes an additional strain on employees and employers who rely on private sector workplace pensions.
Below, we outline five steps to ensure your pension stands the test of time.
Time for scrutiny: Paying close attention to your pension has become all the more important after Reeves’ latest Budget
1. Cut fees before they drain your pension
Starting a workplace pension as soon as you are eligible via auto-enrolment is a great way to help secure your financial future. The earlier you do join one the better.
However, whatever stage of life you are in, be careful about the fees deducted from your pension, whether it is a workplace or a self-invested personal pension (Sipp).
Fees on auto-enrolment workplace pensions have been capped at 0.75 per cent since April 2015, although pension schemes often cost less because most use inexpensive tracker funds, which follow the performance of one or a selection of the world’s stock markets and are cheap to own.
A limited number of older workplace pension schemes can attract fees of between 1 per cent to 1.5 per cent.
Look for the ‘annual management charge’ on your pension statement or online account.
For Sipps, fees can be applied which relate to platform costs, fund charges and dealing charges. Compare your fee to low-cost providers, some of which charge between 0.2 per cent to 0.5 per cent, according to Chest.
If you are unsure about the fees attached to your pension, ask your workplace or pension provider or platform.
2. Check your investments are suitable for your age
Most current employees will be signed up to a defined contribution workplace pension scheme.
Defined contribution pension schemes take contributions from both the employer and employee and invest them to provide a pot of money at retirement. It is then the saver’s responsibility to use this to generate a retirement income.
The minimum threshold for employer pension contributions is 3 per cent of an employee’s qualifying earnings, with the total minimum contribution for both employer and employee set at 8 per cent.
Defined contribution pensions are stingier than final salary, also known as defined benefit, ones and savers bear the investment and income risk, rather than employers.
Your defined contribution pension is invested in funds to grow your savings for retirement – and will often be lumped in a one-size-fit-all default fund.
These invest in the stock market, government and company bonds and other assets.
Many people have no idea where their pension cash is invested.
Your employer’s default pension fund is chosen to fit the average staff member, and the most people, – around 90 to 95 per cent – stick with it.
However, the default workplace pension fund may not always be the best option for you.
Jason Murphy, co-founder of Chest, said: ‘If you’re younger, you may want more long-term growth rather than an overly cautious fund.
‘If you’re older, check you’re not taking more risk than you’re comfortable with.’
Most providers let you switch to a different investment option online in a few clicks.
Knowing which fund is best is not always straightforward. Consider getting professional financial advice if you are not sure where your pension should be invested in order to maximise returns.
Remember that? Tracking down old pensions from previous jobs is a great way to boost your pension pot
3. Track down lost pension pots
According to the Pension Policy Institute, there are approximately 3.3million pension pots forgotten about or lost.
To put this into cash terms, there is about £31billion in lost pensions hard-working workers have no clue about or cannot locate. As more people switch jobs more frequently, the number of old pensions people have is growing
Tracking down old lost pension pots could, in some cases, make a sizeable difference to your life in older age.
David Henderson, head of pensions at Penny Pension, told the Daily Mail that in his experience most lost pensions came in at the sub-£10,000 mark.
However, Henderson added: ‘The largest one found via our firm was £543,000, which could be life-changing. From speaking with users they all describe finding pots as like winning the lottery.’
Use the Government’s free online Pension Tracing Service to track down all your pensions from old jobs.
Contact previous employers if you are unsure which provider they used. Some pension providers may have merged or rebranded, making it a little trickier, but still possible, to figure out who you need to contact.
You may need to provide the pension provider with details like your national insurance number and the dates you worked at the company, so make sure you have these to hand.
Once you have identified all your pension pots, consider consolidating them, but remember that this may not be the best option for everyone.
For some people, consolidating pensions into one place can be a good way to reduce paperwork, potentially reduce fees and create new retirement investing options.
However, certain savers may be at risk of losing valuable benefits attached to old workplace pension schemes, meaning consolidation may not be the best option for them.
In the know: Ali Adam, left, and Jason Murphy, right, are co-founders of fintech start-up Chest
4. Claim any tax relief you are owed
When you add money to a pension, the income tax you would normally pay is usually added to your pension instead via a process known as tax relief.
It means your savings are usually increased by 20 per cent or more, depending on your rate of tax.
Each tax year until you are 75, you can usually get tax relief on all your pension contributions, up to the amount you earn and your annual allowance – this is £60,000 for most and covers all payments into your pension, including any from your employer.
Basic-rate relief of 20 per cent is added to your pension automatically, but higher-rate and additional-rate relief often is not.
‘If the extra relief isn’t being added through PAYE, you can claim it through self-assessment or ask HMRC to adjust your tax code’, Ali Adam says.
5. Make the most of salary sacrifice now
Around 14.6million people are already saving too little for retirement, government figures show. Reeves’ latest salary sacrifice curbs will do little to help resolve this.
Reeves will cap the amount workers can salary sacrifice into pensions without having to pay national insurance at £2,000 a year.
Above this standard rates of national insurance will be charged at 8 per cent on basic rate earnings, up to £50,270, and 2 per cent above this in the higher rate thresholds.
Murphy, co-founder of Chest, said: ‘Working people are already feeling the cost of living pressures, and these changes mean many will end up paying a bit more.’
However, the new £2,000 cap will come into effect in April 2029, meaning you still have ample time to make use of the current national insurance tax break.
Consider upping your pension contributions in the meantime to max out the savings you can make on national insurance while you can.
Adam said: ‘Salary sacrifice remains one of the most efficient ways to reduce your tax bill today.
‘Ask your employer if salary sacrifice is available – many offer it but don’t actively promote it
‘If they match contributions above the legal minimum, increase yours to get the full match while this structure is still in place.’
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