How to get the most out of your workplace pension

Pension provider Aviva has warned that workers are “sleepwalking” into retirement with one in three employees unaware of how many pensions they have.

Workplace pensions are very different in 2023 compared to past decades. Gone are the old final salary or ‘defined benefit’ (DB) pensions and in are defined contribution (DC) pots for our long-term savings.

Making the most of your DC pension really matters – you really do get out what you put into it. There are a few really important aspects to consider with these workplace pensions, and ways to maximise the potential for growth.

Contributions

The first thing to note about DC pensions is there is a minimum contribution level which is set automatically by the Government. While there is always conjecture over what level it should be at, the basic requirements are:

• 5% from your gross income (including tax relief)
• 3% from your employer

Under auto enrolment you will be automatically given a workplace pension pot assuming you earn more than £10,000 a year.

Opting out is essentially throwing away money. If you don’t have the workplace pot, then you’re essentially turning down income from your employers.

The annual contribution limit to pensions is £40,000, which makes it more generous than an ISA in cash terms. It is a good idea then to contribute as much as you can to unlock valuable tax relief.

Pensions are arguably better than ISAs because of this tax relief. While you will have to figure out tax liabilities when withdrawing from a pension later in life, the extra upfront money from tax relief when compared to an ISA means you have more money to start with that can grow over time.

There is another thing to watch out for too – if you earn above £50,000 then automatic pension contributions are actually capped.

For instance, if you earn £45,000 a year your total monthly contribution to a pension will be £187.50. If you earn £50,000 this will rise to £208.33. However, if your income rises to £55,000 the cap on contributions means your employer won’t contribute more, and your salary won’t adjust contributions higher, meaning you’ll be contributing less than 5%.

It is essential to check with your employer and consider asking them to increase your contributions above this level if you want to maximise your pension pot.

Consolidation

A very common issue, as Aviva alludes to in its research, is just how many pension pots we now accrue. Every time you switch jobs you’ll start a new pot with whichever provider your employer uses.

This can lead to a mess of small pots with a mixture of policies, charges and performance, and isn’t ideal.

Some people choose to consolidate all those pots into one coherent SIPP. You can’t do this with your current workplace’s pot because this would mean forgoing those valuable employer contributions, but with old pots you might not be adding to, this can be a good way to manage the entire amount in one place.

There is a caveat to this, however.

The ‘small pot lump sum’ allows you to take a whole pot in one go when it is worth below £10,000, with 25% of it tax free. If the pot is in a workplace pension it’s unlimited how many times you can do this, but if it’s in a personal pension then you can only take three.

It is important to consider your options carefully here and is highly recommend to speak to an adviser who can help you plan the best course of action.

Investment

The final strand of workplace pensions is perhaps the most forgotten of all – investing.

It’s easy to think of a pension as just a savings pot you accrue, but in fact that money is all invested in order to grow over time and maximise the size of the nest egg when you retire.

The issue here is that workplace pension investment options can be a bit lacklustre.

The problem here is that investment options vary enormously by provider. Some offer hundreds of funds while others will offer maybe three to five. There’s nothing you can do about this as it is at the behest of your employer to pick the provider.

However, if you think you might be in an underperforming “default” fund, it is essential to seek advice on ways in which to improve the growth potential of your pot.

The same goes for any personal pension you have, as picking the right kind of funds can set you up for long-term failure or success.