If you’ve got money to spare, you might be thinking about paying it into your pension. From 6 April 2023, you can pay up to £60,000 in total into pension plans each year before having to pay a tax charge, although this figure may be reduced if you've already taken money out of a pension, have no earnings, or earn over £200,000. If you’re employed, you’ll probably have a workplace pension. So is it worth putting your extra 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 extra 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. A default investment solution 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, default solutions usually move your pension pot 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 extra 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
If you don't pay tax and your workplace pension scheme deducts contributions from your gross pay, you won't get any tax relief at all. Similarly, if your employer requires you to use salary sacrifice to pay extra pension contributions and your income is too low to pay tax on, you'll miss out on the benefit of tax relief. Contributions paid into personal pensions from your own money, on the other hand, qualify for immediate tax relief of 20% - even if you're a non-taxpayer. Everyone is entitled to tax relief on up to 100% of their relevant UK earnings or £3,600, whichever is greater.
Remember that the value of investments can go down as well as up, so you could get back less than has been paid in.