Additional pension contributions

SJP Topping up your pension

Getting your retirement savings back on track either means making additional contributions, or pushing your retirement plans to a later date. If you are able to make further contributions, then there are a few things to consider, depending on what type of pension scheme you have.

Making additional pension contributions

Whether you’re heading towards retirement, received a great bonus this year, or simply find yourself a little better off than you were, you should consider putting some of the extra money into your pension. Additional pension contributions can act like booster rockets to the amount of money you have to spend in retirement – and they can help you catch up if you had a career break or had to pause your pension for any reason.

Will topping up my pension affect my tax situation?

Topping up your pension while you’re still earning is extremely tax efficient. If you are a basic rate taxpayer you’ll get the 20% uplift from tax relief – with a further 20% or 25% more if you’re a higher or additional rate taxpayer which should be reclaimed via your annual tax return. Plus, if you have a workplace pension, your employer may raise their contribution to match yours.

Just make sure you don’t exceed your pension annual allowance which is £60,000 for most people and be aware of the carry forward rules - these may work in your favour if you’re going to increase contributions and you haven’t used up your full pension allowance in the last three years.

Do let your financial adviser know what you’re about to do, so they can adjust your retirement financial plan.

The best way to increase your pension contributions will depend on what type of pension scheme you have.

What’s the best way to make additional pension contributions?

If you have a defined contribution (DC) pension – one where your pension pot is the sum of how much money has been paid in and how much it’s grown during the investment period – you may well want to make some additional investments if you received a good bonus. You can either pay in a lump sum, or increase your regular contributions. If you have a workplace pension, your employer may increase their contributions in line with yours.

If you’ve got a defined benefits (DB) pension (sometimes known as a final salary pension) you’ll need to check if you can top up your pension under the pension scheme you belong to. Your financial adviser can help you do this.

You could also think about putting any extra cash into other investments such as ISAs.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

When’s the best time to make a pension top up?

You can top up a pension anytime that suits you. You don’t need to wait for tax year-end, and if you find yourself with some surplus cash putting it into your pension can be a tax-efficient investment for the future. You can put up to £60,000 into your pension (or pensions) in one tax year, but that figure does include all contributions, including the tax relief added by the government and anything your employer might contribute.

If you’re nearing that pension allowance upper limit, you may be able to use pension carry forward. Just have a word with your financial adviser to see what’s the best time to top up for you.

Within the 60,000 allowance, tax relief on your personal contributions is also limited to the maximum of 100% of your earnings in the year or £3,600 If your earnings are lower than this.

Can I top up a state pension too?

The state pension often forms a vital part of many people’s retirement income, and there are ways to top it up if it looks like you don’t quite meet the current requirements for receiving a full state pension.

You now need 35 qualifying years of NI contributions to receive the full state pension. So, it’s important to know how to check your NI record, especially if you’ve had some career breaks, so you can fill in any gaps if you’re able to.

You can request a statement from the Department of Work and Pensions or set yourself up with Government Gateway online through Gov.uk which will show you your contributions record and any gaps.

Go to the Gov.uk website to find out how to catch up, if there’s a break. You’ll normally be able to make the top up payment within six years of the original missing year. Do let your financial adviser know what you’re doing so they can update your retirement income plan.

Topping up your pension – what to consider

Will topping up your pension affect your tax situation?
Have you declared it on your tax return, if you’re a higher or additional rate taxpayer?
Will your employer raise their contributions too?
Is this a good time to review all your pensions?
Have you let your financial adviser know what you’re intending?