After a much-deserved salary bump, it’s tempting to pop open a bottle of bubbly and toast to your success. And why not? You’ve earned it! However, once the festivities are over, consider exploring how to boost your pension pot by increasing your contributions. By adjusting your pension contributions to align with your current financial standing, you could bolster your retirement savings and secure yourself a better lifestyle when you retire.
It’s surprising to learn that despite the advantages of increasing your pension contributions after a pay rise, many workers in the UK fail to do so. FTAdviser reports a study from the Institute of Fiscal Studies that found no relationship between pay increases and contributions to pensions.
According to financial experts, larger salaries, mortgage payments, and tax incentives do not seem to affect the decision of employees to boost their retirement savings. However, keep reading to uncover three interesting reasons why increasing your pension contributions can be advantageous if your income rises.
1. You might not be saving enough
If you’re looking for ways how to increase your pension pot, the first and arguably most crucial step is to ensure that you’re saving enough in the first place. This isn’t uncommon, according to FTAdviser, as the Department for Work and Pensions (DWP) says that 12.5 million people are under-saving for retirement.
Shockingly, the DWP research revealed that 38% of working-age individuals were under-saving, and this figure rose to 43%, or 14.1 million people, when the majority of their defined contribution pension was converted into an annuity. So, increasing your pension contributions after a pay rise can be a strategic move to ensure you are on track for a comfortable retirement.
Not saving enough for retirement can result in significant challenges when trying to maintain your desired lifestyle during your later years. You might have to consider downsizing your home or making compromises to your standard of living, which may not be ideal. That’s why it’s crucial to take steps towards increasing your pension pot to ensure you have enough funds to support your retirement.
2. It could boost the size of your pension pot and give you a more comfortable retirement
By ramping up your contributions, you’ll be adding more funds to your retirement savings, which can help to bolster the overall value of your pension pot.
Brewin Dolphin gives an excellent example of this. Imagine you have a salary of £55,000, are a member of an auto-enrolment scheme, and pay 5% of your earnings into your pension pot. You would make a £183.46 contribution each month and receive roughly £3,302.38 in take-home pay.
If you’re enrolled in an auto-enrolment scheme, your pension contributions are calculated based on a percentage of your “qualifying earnings,” which, for the tax year 2023/24, range from £6,240 to £50,270. However, once your earnings exceed £50,270, your pension contributions may stay static. For example, if your salary increases to £60,000, your pension contributions could remain at £183.46 while your take-home pay rises to £3,544.04. It’s essential to understand how your pension contributions are calculated to make informed decisions when it comes to increasing your contributions and growing your pension pot.
While it may be tempting to keep the extra £240 per month that comes with a higher salary, contributing it to your pension can be a wise decision. By doing so, you’ll be increasing the size of your pension pot, which can provide greater financial security during retirement. Additionally, you may be eligible for tax relief on these contributions, making it an even more attractive option. So, while it can be tempting to spend that extra money now, investing in your future through increased pension contributions can lead to significant long-term benefits.
3. Your employer might match your contributions
If you receive a pay rise and decide to increase your pension contributions, you may also be able to take advantage of contribution matching from your employer. This means that your employer will increase their own contributions to your workplace pension in line with your own increased contributions. According to MoneyHelper, this can be a great way to boost the total value of your pension pot.
For example, let’s say that you currently contribute 3% of your salary to your workplace pension, while your employer contributes 5%. While this may be a decent amount each year, increasing your own contributions could lead to even greater benefits. As you contribute more, your employer may match that increase, leading to a larger overall contribution to your pension pot.
By increasing your pension contributions after a pay rise, you may also be able to take advantage of your employer’s contribution matching scheme. According to MoneyHelper, this is a great way to further increase the value of your pension pot.
For instance, if you currently contribute 3% of your salary to your workplace pension and your employer contributes 5%, you could potentially receive a higher contribution from your employer by increasing your own contributions. Let’s assume you increase your contributions to 8% of your salary. In that case, your employer would match your additional 5% contribution by raising their own contribution to 10%.
Therefore, increasing your pension contributions not only boosts your retirement fund but also maximizes your employer’s contributions, providing a substantial benefit in the long run. Don’t miss out on the opportunity to increase your pension pot; learn how to increase your pension pot today!
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If you want to learn how to boost your pension pot and are looking for advice on how you can make a rise in earnings work for you, please get in touch with us today to find out more.
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 not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
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