If you’ve got money to spare, you might be thinking about paying it into your pension. And if you’re employed, you’ll already have a workplace pension. So is it worth putting your excess savings in there, or could it be better to take out your own personal pension? Here are a few things to think about before making the decision.
The benefits of paying excess contributions into a workplace pension
Maximise employer contributions
Put more money in your workplace pension and you may get more contributions from your employer. In fact, you should only consider paying into a personal pension once you’ve maximised your employer contributions.
A workplace pension has features built into it to help you. Default investments is one of those. It means that if you don't want to make an investment decision, you don't have to. Plus, as you approach retirement, your pension pot will be moved into lower risk investments or investments which are suitable for how you choose to access your pension. This is known as a de-risking programme. With your own pension, you’ll have to be more hands-on and make your own investment decisions.
Workplace pensions usually come with lower charges. In fact, charges for the default fund in workplace pensions can't exceed 0.75% by law. And in many cases, employers will negotiate even lower charges. It's not unusual for workplace pension schemes to have total charges of 0.4% or less when investing in the default fund.
Tax-efficient ways to contribute
If you already pay into your workplace pension through salary sacrifice, your employer may allow you to make excess contributions in the same way. Depending on your individual circumstances, salary sacrifice could be a tax-efficient way to pay extra money into your pension.
When it’s worth considering a personal pension
You want more control
If your workplace pension doesn’t give you the option to choose investments from a wide range, but you’d like to, you could find a personal pension or self-invested personal pension (SIPP) that gives you that wider choice. Good if you’re a knowledgeable investor who would like more control.
You’re a non-taxpayer
Contributions paid into personal pensions from your own money qualify for immediate tax relief of 20% – even if you’re a non-taxpayer. If you don’t pay tax and your workplace pension scheme deducts contributions from your gross pay, you might not get any tax relief at all. Also, if your employer requires you to use salary sacrifice to pay extra pension contributions, you may miss out on tax relief if your income is too low for you to pay any tax on.
Remember, that the value of your investments will rise as well as fall, and you could get back less than you invested.