Topping Up Your Pensions

With both tax-relief and tax-free growth, a pension contribution is the most attractive financial investment you will ever make.

But are you making enough contributions towards it to ensure that you retire with a substantial pension pot?

If you have an employer or workplace pension scheme, then you should remember that the minimum contributions are relatively low and it will not be enough to provide you with an income to lead a comfortable retirement lifestyle.

If you have a personal pension plan, the more you contribute, the more you retire with.

So, should you be contributing more towards your workplace pension or should you top up your state pension? Is an SIPP a better option for you?

Employer Scheme vs SIPP

Irrespective of whether you are trying to up your contribution or add an additional scheme, sticking to your workplace pension scheme makes more sense.

With the new auto-enrolment reforms introduced in 2012, your employer is obliged to make a minimum contribution towards your pension pot.

That’s free money for the taking. Additionally, you have the option of paying your bonuses into the scheme making it easy for you to top up when the opportunity arrives.

The only drawback is that some employer workplace schemes have limited fund options to invest in. And many times, you do not get the personalised attention or support you desire.

That’s where an SIPP can be advantageous.

It provides an investor better control over their retirement savings. There are a plethora of fund options along with equities to choose from. You get personalized attention; you can check valuations and even switch funds in a blink.

An SIPP is a great way to consolidate existing workplace pension schemes that you may have if you have switched jobs recently.

For example, if you have three different pension pots, one from your current employer and two from your previous ones, you can consolidate the other two with an SIPP.

But the extra functionality offered by SIPP comes at additional charges which are higher than the charges on personal or stakeholder pensions.

So, unless you are not adept at making independent financial decisions or do not have multiple pension pots to consolidate, an SIPP might not be the best choice for you.

Additional Voluntary Contributions

If you are the member of a final salary or defined benefit scheme, then any top-up contributions you make will go into a separate AVC plan.

This is akin to a money purchase plan which means, that the eventual value of the plan depends on how much you contribute and how the investments perform.

However, if the AVC is linked to your main defined benefit scheme, you can avail of your 25% tax-free cash lump sum from your top up contributions keeping your defined benefit pot untouched.

Tips to Top Up

While topping up a pension scheme is a desirable proposition, it is not always the most practical one, especially if your current financial circumstances do not allow it.

The rules for contributing more remain the same old tried and tested methods.

Spend Less: The lesser you spend, the more you save, and a part of that savings can be diverted towards your pension funds. Reassess your finances, track expenses, weed out unwanted expenses and find a way to squeeze in that little extra every month to contribute towards your pension top up.

Bonus Sacrifice: If you have a workplace pension scheme then a bonus sacrifice is a great way to top up your pension pot in a tax-efficient manner. For example, if you were to receive a £20,000 bonus, it would be taxable, and you will also have to pay National Insurance contributions to it. If you are a higher rate taxpayer, you could end up with as less as £11,600 in cash. On the other hand, if you decide to pay it into your pension via a bonus sacrifice scheme, it would be tax and NI contributions free. Also, it will help your employer save 13.8% NI savings and most employers are generous enough to pass it to you. So, instead of £11,600 in cash, £22,600 could be added to your pension pot instead.