13 October 2021

Has your income increased? Here’s why you should boost your pension contributions

A pile of one pound coins

Almost a fifth (18%) of UK adults said their income had increased in the three months to June 2021, according to an LV= survey. As the pressure of lockdown eases, employees are also less worried about losing their job or being able to find work. If you have more disposable income now, it could be worth boosting your pension.

There are many reasons why 9.5 million people have benefited from an income increase. For some, coming off furlough as they head back to work will mean their income has increased. For others, a pay rise, switching jobs, or even cutting back on other areas may mean they have more disposable income than they did just a few months ago.

So, what should you do with the extra income?

With lockdown measures lifting, it’s not surprising that 28% plan to socialise more and 36% plan to go on holiday in the next 12 months. A quarter also said they were planning special days out with their family to make up for lost time.

While spending some of your savings or additional income on the things you enjoy isn’t a bad thing, adding some of it to your pension could secure your future. Here are five reasons to think about boosting your pension regularly or with a one-off contribution.

1. Your contributions will benefit from tax relief

Assuming you don’t exceed the Annual Allowance, your contributions will benefit from tax relief. This relief means some of the money you’ve paid in tax is added to your pension, providing an instant boost. So, your money can go further when paid into a pension.

Usually, tax relief is paid at the highest rate of Income Tax you pay. Your pension provider will typically claim it for you, but you will need to complete a self-assessment tax form to claim your full allowance if you’re a higher- or additional-rate taxpayer.

2. Your employer may match your contributions

If your increased income means you could put away more into your pension each month, it’s worth checking what your employer’s benefits are. Some will also increase their contributions to your pension if you do. Others may offer a salary sacrifice scheme that would mean you benefit in the long run.

3. Pension investments can grow free from Income Tax and Capital Gains Tax

When investing for the long term, a pension can make sense. This is because returns from investments held in a pension are not liable for Income Tax or Capital Gains Tax. If you want to invest for your future, a pension can help you reduce tax liability and get the most out of your money.

Instead, you may pay Income Tax when you take an income from your pension. The amount of Income Tax due will depend on your income from all sources, so it is possible to manage your withdrawals to minimise tax.

4. Your investments benefit from the compounding effect

As you can’t access your pension until you’re 55, rising to 57 in 2028, your investment returns are themselves invested to potentially deliver further returns. Over time, these additional returns can add up and help your pension grow at a faster pace. With workers paying into their pension over decades, this compounding effect can mean a more comfortable retirement.

While over the long term, investments have historically delivered returns, it is important to remember that investment values can fall too. If your pension value falls, focus on the long-term trend and what your goals are.

5. It can help you create a more secure retirement

If retirement is some way off, it can be easy to put off adding to your pension now. However, even a slight increase in your pension contributions in your working life can mean the difference between meeting your retirement goals and falling short of them. Setting out what you want your retirement to look like, whether that involves exploring new places or relaxing with loved ones, can help you see if you’re on the right track.

Remember: it could be some time before you can access your pension

While there are compelling reasons to add to your pension, you need to consider when you will want to access the money. Your pension usually isn’t accessible until you’re 55, rising to 57 in 2028. If you’d want to use the savings before this age, you should consider alternatives.

You should ensure you have a financial safety net should the unexpected happen too. Do you have a rainy-day fund to fall back on? As you can’t access your pension, you won’t be able to pay for a leaking roof or cover expenses if you need to take time off work. As a result, you should ensure you’re financially secure before increasing your pension.

Please contact us to talk about your pension and how to get the most out of your savings.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.