How to top up your work pension fund

If you are new to investing, and feel lukewarm or cautious at the prospect, an easy option open to many people with a work pension is to top up investments already held in their retirement fund.

The benefits include convenience, free cash top-ups and potentially lower costs, although you need to be prepared to shut your money away until you are 55 (or 57 from April 2028 onwards).

Our pensions columnist, former Pensions Minister Steve Webb, was asked by a reader whether it is better to put spare savings into a work pension or open an investment Isa. 

Spare savings? An 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

He identified the advantages of opting for the pension as: 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. 

‘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 confront you would have to turn to potentially high cost credit rather than use your rainy day savings.’

What are the rules on paying extra into your pension?

You can typically pay a total equal to your salary up to a maximum of £60,000 a year and get pension tax relief – a top-up from the Government – though this tapers down to £10,000 for higher earners. This is known as the annual allowance.

How pension tax relief works is that you acquire rebates on contributions paid into your pension, based on your income tax rate of 20 per cent, 40 per cent or 45 per cent. 

Helen Morrissey: Many employers match increased pension contributions up to a certain level

Helen Morrissey: Many employers match increased pension contributions up to a certain level

These take you back to the position you were in before income tax. 

The annual allowance includes your own and your employer’s contributions into a pension, and the tax relief itself. 

One very important perk of the annual allowance is that you can still benefit from any of it left unused over the three previous tax years, under certain conditions. 

> How does the annual allowance work: Read a This is Money guide. 

It’s also 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 execute to pay in extra.

You could do this by increasing the percentage you pay in each month, as many employers will then match it.

Helen Morrissey, head of retirement analysis 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. 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.

STEVE WEBB ANSWERS YOUR PENSION QUESTIONS

       

The process 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. Getting started – 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 demand some basic details, admire 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. However, a ‘walled garden’ of other funds are usually available, though you should check the charges as they may be higher.

You can also check what percentage of your salary you are currently paying in, and whether you can enhance this to get higher matched contributions from your employer, in addition to the tax relief top-ups from the Government, as explained above.

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 ‘handle 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 supply details to pass security questions relating to your pension account.

‘We can then supply 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 supply your pension account number.

Emma Byron: To pay in a lump sum via the phone, you would need to pass security questions and money laundering checks

Emma Byron: To pay in a lump sum via the phone, you would need to pass security questions and money laundering checks

‘We also adopt 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 strategize number and bank details, such as the bank’s name and the address your account is registered to.

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 preserve 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 credit and money laundering 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 acquire a lump sum.

‘Assuming these checks are passed, and no encourage information is required from you, this does not slow down the process.’

Aviva says: ‘We use a system to confirm 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 demand 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 enlighten 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 to consider: 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 admire 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 allowance?

The usual £60,000 limit is explained above and you should check you don’t go over it, as if you do HMRC will claw back the tax relief you received.

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. 

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 preserve on maxing out any employee/employer contributions or maxing out any tax benefits.’

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