Employer pension contributions
These are simply payments your employer makes into your workplace pension scheme on behalf of you and the other members. Effectively, it’s free money, and that’s worth having!
How much will my employer pay into my pension?By law your employer must auto enrol you into their workplace pension scheme and pay into it. For a typical defined contribution pension, in which you build up your own savings pot, the rules require your employer to pay contributions based upon a percentage of your earnings. The minimum they have to pay is 3% of your earnings, but it could be more, subject to limits.In a defined benefit pension, there’s a single scheme covering all members. Your employer pays in to build up the guaranteed pension that you receive at retirement. The amounts they pay on your behalf vary depending on your age, salary as well as other factors such as how long people live. The contributions are almost always higher than other types of pension, which is why the retirement benefits are so good.
Do employer payments make a difference to my pension?
Oh yes they do! And, keep in mind it’s free money. For example, Mike, a 30-year-old employee decided not to join his workplace defined contribution pension scheme, opting instead to pay £104 per month into his private personal pension. By age 65, his pension fund was estimated to be worth £80,800.*
By deciding not to join his workplace pension, Mike missed out on his employer’s matching contribution of £104 per month which was paid alongside the £104 he was required to pay. If Mike had joined his workplace scheme, then at retirement his fund was estimated to be worth a whopping £161,000.* That’s an eye watering difference to his personal pension and just goes to show why you’re better off in!
If you’re in a defined benefit pension scheme, the amount your employer pays in tends to be much higher and is shown for the whole scheme rather than just for you as an individual.
Does my employer benefit from paying into my pension?
Employers can treat the payments as an allowable business expense for corporation tax. They’re also not liable for employer’s national insurance payments on pension contributions they pay for you, which is different than if they were paying your salary. So, it’s tax efficient for them too.
Can my employer pay my contributions for me?
Yes, they can in two ways. Some employers don’t ask you to contribute as they pay all the pension contributions. The other way is called salary sacrifice. Sounds grizzly, but it actually isn’t! Effectively, you agree to give up enough salary to cover your pension contribution, and your employer adds this to their payment which is then paid to your pension as a single amount.
Salary sacrifice is a ‘win win’ situation. You get tax relief as normal, and don’t pay National Insurance contributions (NI) on the salary you give up. Typically, your savings can be used either, to boost your take home pay, or your pension payment. Your employer also saves because they can offset the pension payments against their business costs, and they also don’t pay NI on the income you give up.