What to ask potential employers to maximise your pension pot
When you’re offered a new job, understanding the pension scheme might not seem like the most important factor in your decision-making process.
But maybe it should be, because your pension is part of your overall reward package, along with your salary and other benefits.
In fact, the difference to your pension pot between the least and most generous schemes on offer could total £278,000 over your working lifetime, according to interactive investor.
That’s why the DIY pension platform is urging people to consider the pension provision as part of their overall job package and ask questions of their potential employer to gauge how generous their scheme is.
Becky O’Connor, head of pensions and savings at interactive investor, said: “Think of a pension as an effective, deferred pay rise and you will soon start to pay more attention to the percentages on offer from a potential new employer. The minimum contribution may be 8%, but some employers are far more generous, with total contributions from some workplaces equal to more than 20% of salary.
“Over a lifetime of earnings, this extra can mean the difference between a reasonably basic retirement and a comfortable one when you give up work.
“According to interactive investor’s calculations, someone starting working life on a typical graduate salary, receiving pay rises of 1% a year, 2.5% above RPI investment growth and with a pension contribution of 8% would retire with a pot worth £186,000 at age 68. This rises to £464,000 with a total contribution of 20% a year throughout working life – a £278,000 difference.”
What questions should you ask?
O’Connor has listed her top tips on what to ask a potential new employer about their workplace pension scheme. She said that ‘if you are lucky enough to be choosing between jobs with similar salaries, then the generosity of a pension may swing it for you’.
1. Ask the recruiter or HR team at your prospective employer what the maximum contribution allowed is from you and up to what level will the employer match or ‘double match’ your contributions.
An example of matching is you contribute 5% and your employer contributes 5%. Double matching would mean you put in 5% and your employer contributes 10%. It’s worth remembering that with all pensions, can also increase your own contributions up to the annual allowance of £40,000 or your maximum earnings, if lower, even if the employer doesn’t continue to match them.
2. Ask if your workplace pension scheme offers a sustainable fund option.
The way pensions are invested by big workplace schemes can have an impact on the planet, as they may be invested in fossil fuels, or more beneficially, renewable energy. If this is important to you, ask whether a green option is available before signing up.
3. Ask what type of pension scheme your potential new workplace offers.
The chances are it is defined contribution (so you know what you will put in, but what you get out will depend on investment performance), but if a public sector role, it could be defined benefit, in which case when you retire you will receive an income based on your salary when you were working. The latter are less common now but often more generous overall.
4. Check what tax relief you will receive on contributions.
Basic rate taxpayers will receive 20% tax relief. If you will be earning more than the higher rate tax threshold of £50,270, you can receive 40% relief on contributions and if you earn more than £150,000, you are entitled to 45% tax relief on contributions.
5. Ask whether the scheme takes ‘relief at source’ (after tax) or is ‘net pay’ (before tax).
This can be particularly relevant to lower earners as with net pay schemes, people earning below the £12,570 personal allowance threshold won’t get tax relief, because they don’t pay income tax. With ‘relief at source’, they will still receive tax relief. It can also be relevant to higher earners, as with relief at source, higher earners may need to claim tax relief above the basic rate through their tax return – a bit of extra hassle.
6. Ask if your employer agree to pay your pension contributions into a Self-Invested Personal Pension (SIPP), so that you can choose how to invest your own pension?
Some employers do offer this and it can be a good option if you want full choice and control over where your pension is invested.
7. Check if you will receive a bonus and if you can invest this into your pension?
‘Bonus exchange’, where your bonus is paid directly into your pension, can result in a significantly reduced income tax and NI bill. If doing so would take you over your annual allowance of £40,000 (or maximum earnings if lower) in a tax year, consider using ‘carry forward’, which allows you to use up unused allowance from the previous three tax years.