Are Pension Contributions for Me?

Have you thought about your retirement? 

If you want to enjoy it, pension contributions would be one thing to consider.

Firstly let me summarise the different types.

-          Occupational pension scheme         -               Pension contribution is deducted from gross pay.

-          Salary sacrifice                                    -               Pension contribution is deducted from gross pay

-          Personal/Stakeholder scheme         -               Pension contribution is deducted from net pay.

Regarding the first two, these work very similarly but the salary sacrifice has additional benefits to the employee.

An occupational scheme would work as follows.  For example, an employee receives monthly gross pay of £1000 and wishes to pay £100 into a pension scheme.

That individuals payslip would look like this:-

                Gross pay                                             £1000.00

                Less pension contribution                 (£100.00)

                Taxable pay                                         £900.00

The individual would pay tax on £900 per month and nics on £1000 per month and £100 would be paid into their pension scheme.  The tax relief has already been received at source.

For a salary sacrifice scheme, this works exactly the same as above except for two things.  1- As this is a sacrifice of salary then the tax and nics will be due only on the £900 (not £1000 for nics)  and 2- The employer can add the tax and nic savings to the pension contribution made for the employee.

In the above example, there would be a tax saving of £20 (£100 x 20%) and nic savings of £12 (£100 x 12%) equalling £32.  This £32 saving made for the employee can then be added to the pension payment making the pension contribution made per month £132 (£100 + £32).

For the personal and stakeholder scheme, the pension contribution is simply taken off last from the net pay.  So in the above example again, tax and nics will be calculated on £1000 then £100 will be deducted afterwards as the pension contribution.

The £100 is then paid to the pension provider, who gross this up, claim from the government another 20% and add on top.

One advantage to note regarding a stakeholder pension scheme is that the employee can take this with them if they leave for another job.

Usually it is employer who chooses pension provider and pays pension contributions to them on behalf of employee.