Best ways to top up your pension

Published by Rachel Lacey on 14 May 2014.
Last updated on 19 January 2016

Top up pension

But what is the best way of increasing your pension saving? Does it make more sense to pay more into your employer scheme or set up your own savings scheme like a Sipp? Or are pensions even the best home for this additional saving?

Personal pensions: a guide

What will work out best for you will depend on the nature of your workplace scheme as well as the ease, convenience and control that you require in managing your investments. How much more you intend to pay should also influence your choice.

As a first step, Laith Khalaf, head of corporate research at Hargreaves Lansdown suggests looking at your employer scheme.

Bonus sacrifice

If you are paid a bonus - asking your employer to pay this into your pension can be particularly tax-efficient.

Take the example of a £10,000 bonus. If this was paid via a bonus sacrifice scheme straight into your pension you would not pay any tax or national insurance on it. Your employer would make an NI saving too of 13.8% and it's not uncommon for employers to pass this on to you, boosting your total contribution to £11,300, according to Hargreaves Lansdown.

However, if you took your bonus it would be subject to tax and NI – so a higher rate taxpayer would end up with just £5,800 in cash compared to £11,300 going into your pension.

Upping monthly contributions

Khalaf says that even if you just want to increase your monthly contributions, sticking with your workplace scheme should still be your first choice if it means your employer also pays in more as a result. "But if you've maxed out on your employer contributions then you have a freer rein as to where to invest."

Workplace pensions: a guide

Work scheme vs Sipp

Once you have reached the point where there is no further financial incentive to sticking with your employer's scheme, it may make sense to set up your own private pension such as a Sipp.

Some work schemes are definitely better than others. "I've seen company schemes that offer just six or seven funds," says Khalaf. And even if you do have a decent fund selection, it may still be difficult to manage or make the right fund choices. "Some fund lists read like a phone directory – you don't get the level of support that you do in the individual market."

If you want to switch funds you may have to fill out and post a form and if you can manage any of your pension online you may not find it's available when you need it. "We've even come across pension websites with opening hours!" remarks Khalaf.

So for the investor who wants to take control of their retirement saving, a Sipp – that offers access to the whole fund universe as well as shares – can have a lot of advantages over work-based schemes. It's quick and easy to check valuations, research investments and switch funds online 24/7.

You don't just have to pay your top-up contributions into your Sipp, it can also be a great way of consolidating any pensions you may have – but are no longer contributing to – with previous employers, meaning you now just have two schemes to manage.

David Macmillan, managing director of Aegon says: "We've found, on average that by the time our clients hit 60, they've got 5.5 different pots. By having all that money in one place it can help drive down the cost of investing and administration."

Is Sipp always best?

Sipps invariably offer investors the biggest choice of investments. But that doesn't necessarily make them the right choice for you, warns Patrick Connolly, IFA at Chase De Vere.

"There is often a misconception that a Sipp is the most appropriate wrapper for all investors. Charges on Sipps are typically greater than charges on a personal or stakeholder pension. There is little point in paying these extra charges if you are not intending to use the extra functionality." And while investment freedom is a great boon for experienced investors, it can be a risk for those who don't know what they are doing.

"Many Sipps are little more than personal pensions with an extended range of fund options. While investors may appreciate this extra choice, it could prove a disadvantage if they inadvertently invest in specialist funds which are higher risk than they appreciate."

For those savers that are less confident at making their own decisions and aren't receiving independent advice it may make sense just to pay more into your existing work scheme. Likewise if you are only going to be topping up your contributions by a small amount or don't have other schemes to consolidate, it may not be enough to justify the costs involved with setting up a new plan.

Topping up final salary pensions

The position is a bit different if you are a member of a final salary or defined benefit scheme. "Most defined benefits schemes will have the facility for you to pay in extra," explains Andrew Tully, technical director at MGM Advantage. However, the money won't go into your ‘defined benefit pot' rather it will go into a separate AVC (additional voluntary contributions) plan. This will be money purchase (or defined contribution), meaning the eventual value of this plan is not fixed and is dependent on both how much you pay in and how the investment performs.

In some cases the money saved into this pot will be linked to the main defined benefit scheme. This means you can take your tax-free cash from your defined contribution top-ups as Tully explains. "It leaves your defined benefit pot intact which can be quite advantageous. Commutation rates [for taking tax free cash from defined benefit schemes] can be quite ungenerous."

However if your AVC scheme is not linked (many aren't) you will have to decide whether to go with the ease and convenience of your work scheme - but potentially limited fund choice - or the freedom and flexibility of a standalone Sipp.

Are pensions the best savings vehicle?

Whatever type of scheme you have, it may also be that a pension isn't the best home for your additional savings. If you want to maintain the ability to access the money before your retirement if needs be, an Isa might make sense. Although you don't get the tax relief on contributions (as you do with a pension) your money grows tax-free and there will no tax to pay when you cash it in making it a great way for preparing for any lump sum expenditure in retirement.

Maxing out on Isas may also be a sensible option if you are lucky enough to be close to breaching either the annual or lifetime allowance - after which point pension saving ceases to be tax efficient.

How much can I pay into my pension?

Connolly says: "For most people the best approach for long-term savings is a combination of pensions and Isas. Pensions provide initial tax relief which give your savings an immediate uplift, whereas can still be tax efficient and you can access your money whenever you like. Before you invest more in your pension, make sure you've got the right balance between the two."

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