Am I paying too much into my pension?

23 October 2012

Q

I am a higher-rate taxpayer and currently pay 9% into my company's group pension scheme, which my employer matches - this is the maximum amount it will match.So, I'm saving approximately £1,000 a month into my pension.I recently decided to increase my contributions over and above the 9% the company will match and started paying in a further £500 a month.But I have now stopped as I was informed this is a 'bad idea' for higher-rate taxpayers, can you explain why this might be the case?
From
AC, Fochabers

A

You are taking a sensible approach to your pension contributions and also seem to be benefiting from generous contributions made by your employer. This is all very positive.

So I am unsure why somebody has suggested that it would be a bad idea for you to make additional payments. It could simply be because your employer stops matching your contributions at 9%, and so anything you pay in up to 9% will be more beneficial than payments made above that level.

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This is a fairly spurious argument as you will continue to benefit from the 9% contribution from your employer and will get initial tax relief on all of your contributions, up to and beyond 9%.

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Perhaps it is because any additional contributions will push your salary, after pension contributions, below the higher rate tax threshold. This could mean that any further contributions you make benefit from 20% rather than 40% initial tax relief.

It could also be that whoever administers the scheme on behalf of your employer does not want to make the necessary administrative changes required for contributions above the amount where you employer matches contributions.

Or, it may be the proverbial 'bloke down the pub' who has given you this pearl of wisdom.

For most people, the positive tax benefits would make it a really good idea to invest more into their pension.