Can someone explain an employer pension plan?

CreditCardChris

I've never had a job where my employer contributed towards a pension, in fact I've never paid a penny to any kind of pension in my life.

However my new job has a pension plan where they match my contribution, I think they match up to 5%.

I have a few questions though. Firstly where exactly is my money located, where does that money go if I quit that job? Will the employer really add on 5%? So if I contribute £1900 a year, they'll also contribute £1900 for nothing?

If someone has 5 different jobs in their lives, all of which have a pension plan, how do you track how much you have and where it's located?

Thanks.

Albermarle

The employer will have an arrangement with a pension provider . Both yours and their contributions will be sent monthly to the provider . Within the pension there will be a choice of investment funds to choose from . If you don't do anything /no idea what to do , there is a default fund where the money will go .
This default fund will contain various investments linked to the financial markets .
So over time your pot of money in the pension will increase with each monthly contribution and hopefully investment growth .
As well as free money from your employer you will also benefit from tax relief.

If someone has 5 different jobs in their lives, all of which have a pension plan, how do you track how much you have and where it's located?

Normally you receive an annual statement for each one and normally nowadays you should be able to check on line . At some point you can consolidate the pensions if you want .

Albermarle

Check this link as well . It's a government website
https://www.pensionsadvisoryservice.org.uk/

MaxiRobriguez

"Firstly where exactly is my money located"
- Depends on the pension provider your employer has chosen. Ask your employer and they will tell you.

"Where does that money go if I quit that job?"
- Nowhere, the money is yours. You will have a personal account with the pension provider and should have the ability to access the details online.

"Will the employer really add on 5%? So if I contribute £1900 a year, they'll also contribute £1900 for nothing?"
- Yep. The idea is your £1900 contribution comes from you sacrificing your salary. By doing this, the company gets to avoid paying NI tax on whatever you sacrificed.

Question you should have asked:

"Is there anything to stop me paying more than 5?%
- No, you should be able to choose whatever % you like, it's pretty difficult to sacrifice so much to get you close to breaking regulatory caps.

"Should I pay in more than 5%, even if my employer doesn't match anything over 5%?
- Almost certainly yes. If you take it as salary, you're likely to be taxed 32% (if you're basic rate) on it. If you sacrifice it, you avoid that tax. For example, if you choose to sacrifice £2,500 instead of £1,900 - an extra £600 a month, it would only reduce your monthly pay by £400. The extra £200 you've gained for nothing can be put to work earning dividends and share price growth.

cloud_dog

MaxiRobriguez wrote: »

"Firstly where exactly is my money located"
- Depends on the pension provider your employer has chosen. Ask your employer and they will tell you.

"Where does that money go if I quit that job?"
- Nowhere, the money is yours. You will have a personal account with the pension provider and should have the ability to access the details online.

"Will the employer really add on 5%? So if I contribute £1900 a year, they'll also contribute £1900 for nothing?"
- Yep. The idea is your £1900 contribution comes from you sacrificing your salary. By doing this, the company gets to avoid paying NI tax on whatever you sacrificed.

Question you should have asked:

"Is there anything to stop me paying more than 5?%
- No, you should be able to choose whatever % you like, it's pretty difficult to sacrifice so much to get you close to breaking regulatory caps.

"Should I pay in more than 5%, even if my employer doesn't match anything over 5%?
- Almost certainly yes. If you take it as salary, you're likely to be taxed 32% (if you're basic rate) on it. If you sacrifice it, you avoid that tax. For example, if you choose to sacrifice £2,500 instead of £1,900 - an extra £600 a month, it would only reduce your monthly pay by £400. The extra £200 you've gained for nothing can be put to work earning dividends and share price growth.

Hi

I think we need to be careful here. The term 'Salary Sacrifice' (sometimes referred to as 'Salary Exchange') has a specific connotation to pension contributions and savings of NI premiums.

Standard pension contribution deductions (RAS, Net salary) do not use the Salary Exchange method and therefore do not save on any NI premiums. Nowhere has the OP indicated that Salary Exchange is in operation here. It may well be but we have zero confirmation of that.

Albermarle

The idea is your £1900 contribution comes from you sacrificing your salary. By doing this, the company gets to avoid paying NI tax on whatever you sacrificed.

The OP did not mention exactly how the pensions contributions were made so it may not be salary sacrifice arrangement .

To the OP - There are different ways in which you and the employer can make the contributions and it varies from company to company . Whichever way you will still get the free employer 5% and tax relief on your contributions . If the company operates a salary sacrifice arrangement then you get even more benefits as Maxi detailed.

MaxiRobriguez

Fair, I misread - thought they had mentioned pre-tax sacrificing.

HCIMbtw

So my company pension is salary sacrifice, except for the voluntary contributions I make above the standard for somebody at my grade. The additional voluntary contributions benefit from income tax relief, some at 40% some at 20%, but I do not get the NI relief which is annoying, and I have raised with the pension team that I would like them to arrange for this to be possible.!

Scottish!Widows and Aviva would be two examples of pension companies that spring to mind.!

If you move jobs, you will likely get into a new pension system with a different company or scheme. You can usually port the balance from your old pension over to a new one to have it all in one place, a bit of paperwork and hassle, but you might also not mind having a few different pension!pots, invested in different funds, spreading a bit of risk around and just happily keep a record of them. If you jump around dozens of jobs keeping track of all your pension pots can be tricky, and some of them usually end up very small in this scenario and not really worth holding on their own.!