Many people concerned about the inflation threat to their savings will be considering whether to put any spare money in an investment rather than a cash Isa in the current tax year.
Consumer prices rose 5.5 per cent in January, and previous expectations that the rate would peak just above 7 per cent this spring look conservative given the tragic war in Ukraine.
If you already have an investment Isa, or are keen to get stuck into investing, we looked at the best funds and trusts to protect your wealth here.
But if you are new to investing, and feel lukewarm or cautious at the prospect, one easy and potentially lower cost option open to many people with a work pension is to top up investments already held in their retirement fund.
Spare savings? An option open to many people with a work pension is to top up investments already held in their retirement fund
Our pensions columnist, former Pensions Minister Steve Webb, recently answered a reader question about whether it is better to put spare savings into a work pension or open an investment Isa.
He says there are broadly three advantages to opting for the pension: Government and employer top-ups; the opportunity to withdraw a 25 per cent tax-free lump sum when you decided to retire; and lower investment charges which are capped at 0.75 per cent on ‘default’ funds and can be even lower.
But Webb, who is a partner at pension consultant LCP, cautions: ‘The one big advantage of an Isa is that you can get at your money straight away, whereas with a pension it is locked up until your late 50s.
‘If you already have separate money set aside for “rainy days” or emergencies, then you may be happy to lock up your additional savings in a pension.
‘But it is important not to leave yourself so stretched for short-term savings that if you had an unexpected cost to meet you would have to turn to potentially high cost credit rather than use your rainy day savings.’
What are the rules and benefits of paying extra into your pension?
Adrian Lowery, personal finance expert at investing platform Bestinvest, explains: ‘Each year you can pay a total amount equal to your salary but up to a maximum of £40,000 (although this can taper down to £4,000 for higher earners) into a pension and benefit from pension tax relief.
‘This is known as your annual allowance.
‘Those who have spare money to put away towards the end of the tax year and who have not used this allowance can still take advantage of pensions tax relief.
Helen Morrissey: Many employers match increased pension contributions up to a certain level
‘The taxman automatically tops up pension payments by the basic rate of 20 per cent and those paying higher or additional rates of tax can claim back another 20 per cent and 25 per cent respectively.’
However, it’s important to make sure you are getting the maximum possible advantage from free employer contributions into your pension – not just tax relief from the Government – if you decide to pay in extra.
You could do this by increasing the percentage you pay in each month, if your employer is generous enough to match it.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, says: ‘While many employers contribute at auto-enrolment minimums, there are others who will offer an employer match – this is where they will match your increased contribution up to a certain level.
‘Over time this can give your pension planning a significant boost so it’s well worth investigating if your employer offers it.
‘If you’ve got a bit more spare cash, you can also look at making a one-off larger contribution to your pension.
‘While contributing £40,000 is a tall order for many people you might find it becomes possible if you have received any windfalls or inheritances.
‘Making such a contribution – even as a one-off – can have a significant impact on your retirement planning and if left invested for several years could leave you with a much larger pension than you otherwise would have.’
We look at what to expect when you contact your work pension provider about paying extra into your fund, and some other issues to consider below.
Practical guide to putting lump sums into a work pension
We asked some top workplace pension providers to explain the process for making personal contributions.
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
This does vary so you will need to go online or contact your provider direct for their specific requirements for making payments – but here are the basic steps to follow.
1. Log onto your work pension account
It is sensible to do this first, although not all providers will allow you to pay extra contributions online and it is fairly likely you will have to phone up.
Setting up online access will require some basic details, like your pension account number (available from your employer if you can’t find it), name, date of birth, and possibly your National Insurance number. You might also need to go through identity checks at this stage.
If you haven’t done this before (or recently) it will be a useful starting point to go online and look at how much you have saved into your pension so far, where you are invested at present, and what other investment funds are available.
Many people stick with their ‘default’ pension fund, but here is our guide to checking whether it is up to scratch and how to research the other funds on offer.
You can also check what percentage of your salary you are currently paying in, and whether you can increase this to get higher matched contributions from your employer, in addition to the tax relief top-ups from the Government, as explained above.
Read more here about the benefits of taking full advantage of matched employer contributions.
If you have not yet maxed these out, you may be able to adjust the percentage of your salary you pay in online, or you can contact your employer about doing it.
Once you are logged in, Aviva offers the option of making single personal contributions online or via its app. Legal & General does not currently do so, though it says it is likely to add this feature online in future.
Aegon says that some employers it works with include a ‘manage my bonus’ function online, which allows their staff to assign a percentage of their bonus to be paid as a one-off contribution into their pensions.
2. Phone up if necessary
You might be able to pay in via your employer, and if so you would have to follow whatever process they have in place.
If you contact your pension provider, they will ask for some personal information from you to carry out checks and process the transaction.
You will have to find out your pension scheme’s bank details, and give your own bank details so your firm will know where your contribution is coming from. You might also have to give a fairly exact time and date of when you intend to make a payment into your pension.
Emma Byron, managing director of Legal & General Retirement Solutions, explains: ‘To pay in a lump sum via the phone, you would need to provide details to pass security questions relating to your pension account.
‘We can then provide you with the bank details for you to submit contributions via BACS and mailbox details should you wish to email us to confirm.
‘When submitting via BACS/Telegraphic Transfer you would need to provide your pension account number.
‘We also accept single contributions via cheques or through your employer via their regular contributions. Putting in a lump sum via your employer is often the simplest and quickest way to do it.’
Aviva says it will ask for your pension plan number and bank details, such as the bank’s name and the address your account is registered to.
Emma Byron: To pay in a lump sum via the phone, you would need to pass security questions and money laundering checks
For an identity check, it will need your National Insurance number, date of birth, first line of your address and postcode, and employer information.
Aegon says: ‘Our customer contact centre would need to verify personal details (NI number, date of birth, address). Our customer contact agents will support their bespoke enquiry based on the type of pension scheme.
‘A step-by-step guide can also be provided on the process to make a single contribution.’
3. There might be other checks
Your pension firm will probably want to do a credit check on you, and ensure your money has come from a legal source.
Byron says: ‘We carry out money laundering checks on all new lump sums received, and then once a year each time we subsequently receive a lump sum.
‘Assuming these checks are passed, and no further information is required from you, this does not slow down the process.’
Aviva says: ‘We use a system to validate identity while the customer is on the call (hence asking for bank details to verify the account – this is not needed on every call though). Providing the check passed on both person and account we can take the payment.’
Aegon says: ‘We follow appropriate regulatory checks to keep the member and their money safe, so would complete an anti-money laundering check. We also require a source of wealth document if the value of the contribution is over £30,000.’
4. Paying in subsequent lump sums
Pension providers assure us that once you have got through the process of making your first personal contribution, it will be quicker and easier to make future payments into your pension.
Aviva says the process is straight forward after the first payment has been set up and completed.
‘Once bank details are on the system, the member needs to inform us of amount, product, investment and bank details where payment has come from (so we can verify). This can either be done online by email or phone.’
Aegon says: ‘The checks are easier unless there has been a change of personal details between payments. These instructions are covered in our information packs issued on the member’s first single contribution.’
What else should you consider before making extra payments into a pension?
>>>Does your employer offer salary sacrifice?
‘Salary sacrifice’ schemes are a nice little earner for many workers and their employers, because they are essentially a legal way to dodge National Insurance payments.
Employers allow staff to take a supposed ‘pay cut’, but the money gets ploughed into their pension or put towards some other benefit like childcare instead, and both sides pay less NI as a result.
Aegon says if a pension scheme member wants to make a single contribution directly with their employer via salary sacrifice, it recommends speaking directly to your HR or payroll department first.
Are you exceeding your annual or lifetime allowance?
The standard amount you can put in your pension every year and qualify for tax relief – including your own and your employer’s contributions, and the tax relief itself – is £40,000.
The rules are more complicated for higher earners, whose annual allowance is ‘tapered’ down to either £10,000 or £4,000.
The threshold income level, where people’s annual earnings start being calculated for the purposes of pension tax relief, is £200,000.
But the annual allowance starts being tapered down for people with an adjusted income level – which includes pension contributions – of £240,000.
For those with adjusted income of £300,000 or more, the taper will reduce the annual allowance to just £4,000. Read more here.
Meanwhile, the lifetime allowance is how much you can save into a pension and get tax relief in total, and is currently £1,073,100. The Chancellor intends to freeze it at the level until 2025/26. Read more here.
Emma Byron of L&G says before putting a lump sum in your pension, you should check the tax implications of what you are doing.
‘The tax position will differ depending on the type of scheme, how the contribution is paid, and whether you are a basic, higher or additional rate taxpayer, so make sure you check your tax relief has been applied correctly, either with your employer or by contacting HMRC if necessary.’
Can you afford to use your ‘carry forward’ allowance?
You can use up unused annual allowance from the three previous tax years, under certain conditions.
You need to have been a member of a pension scheme during the years you intend to ‘carry forward’ annual allowance from, although you don’t need to have paid anything into it.
That often catches out people, such as the self-employed, who have neglected retirement planning and are trying to build up a pension from scratch.
You must also use up your entire annual allowance first for the year in which you want to do carry forward, and you have to go back to the earliest of the three years and use up the allowance from then first. Read more here.
Would you benefit from consulting a financial adviser?
If your finances are complicated or you are well off you might find it worthwhile to contact a financial adviser to ensure you are taking full advantage of tax allowances and your pension.
Aegon says: ‘We advise that our members contact a financial adviser for any support on maxing out any employee/employer contributions or maxing out any tax benefits.’
TOP SIPPS FOR DIY PENSION INVESTORS
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