I want to use a big pay rise and bonus to boost my pension, after failing to save much in my 20s – what’s the best way to do this? Steve Webb replies
I would like to increase my pension contributions to make up for my 20s where I failed to save much at all (£15,000).
I’d specifically like to make the most of carrying forward my annual allowance for the last three years which has been substantially under-utilised.
I’m now in my early 30s, recently moved into the higher rate of income tax bracket and have the chance of a significant bonus too.
Savings ambition: I want to use a big pay rise and bonus to boost my pension, after failing to save much in my 20s (Stock image)
While I feel fortunate, I’m still used to living frugally, so I would be happy to sacrifice as much as 50 per cent of my salary (and 100 per cent of the bonus) having now purchased a home and built an emergency cash fund of 12 months’ expenses.
I’m also saving into a cash Lifetime Isa for retirement to offset the risk of buying into my workplace pension at what may or may not be the ‘top’ of the stock market.
Frustratingly, I’m not clear on what past documentation details both mine and my employer’s contributions or if I need to actively ‘claim’ the allowance.
Is this available on my P60 or payslips? Or should I reach out to my previous and current workplace pension providers? Do I also need to file a tax return?
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Steve Webb replies: It’s great to hear from someone relatively young who is keen to get moving on pension saving!
The short answer is that I would be surprised if you need to worry too much about exceeding tax relief limits.
As you know, most people can put £40,000 per year into a pension and receive tax relief on their contributions.
Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below
As well as being allowed to put £40,000 each year into a pension, you can make use of unused allowances from the three previous years – a process known as ‘carry forward’.
Assuming that you have been contributing into ‘pot of money’ or ‘defined contribution’ pensions, what you need to look at is the total amount that you and your employer paid in to your pension in each of the last three financial years (16/17, 17/18 and 18/19).
You should be able to find this amount on your annual pension statements, or ask your pension provider for the figures if you cannot find them.
If the amount was below £40,000 in any year, then the balance can be brought forward to the current year and added to the £40,000 limit for this year.
To give an example, suppose you and your employer paid in £10,000 in 16/17, £20,000 in £17/18 and £30,000 in 18/19. This would leave you £30,000 ‘spare’ allowance from 16/17, £20,000 spare from 17/18 and £10,000 spare from 18/19, a total of £60,000.
This can be added to your £40,000 for this year giving you a total limit of £100,000 in contributions for the current year. I should add that you can only go up to 100% of your total income (including bonuses) for this year, so if your income plus bonuses was, say, £90,000, that would be your limit.
If you are putting this money into a personal pension, the pension provider will only claim basic rate tax relief on your behalf.
Since you are a higher rate taxpayer, you would need to fill in a tax return to claim any higher rate relief to which you might be entitled.
But if there is any way of making these contributions through your workplace pension, it is possible that you might be able to pay the money in ‘gross’ and get all the tax relief immediately. The best thing to do would be to check with your workplace pension scheme to see if this is possible.
One important thing to note is that the £40,000 limit (or the £100,000 limit in my example) includes employee contributions, employer contributions and any tax relief paid in to the pension. So the key figure is the actual gross amount received by the pension.
Finally, although I can’t give you personalised financial advice, I was surprised to see a young person talking about investing in cash ‘for retirement’.
Although investing in cash is very low risk, with inflation running at around 2 per cent and interest rates below this you are guaranteeing a real terms loss every year, potentially for decades to come.
Whilst you are right that the stock market could go down, there are ways of investing across a range of assets which can reduce your overall risk without locking in to negative real returns for years to come.
Also, employees who use a Lifetime Isa to save for retirement – as opposed to just saving to buy a first home – over using their work scheme will miss out on employer contributions into their pension.
The above point won’t apply to you, because you are maxing out your annual allowance through contributions to your workplace pension on top of saving into a Lifetime Isa.
But it is worth noting for the sake of other readers who may be choosing between using their work pension and a Lifetime Isa for retirement saving – the former gets you free money from an employer, while the latter does not.
In your case, given the amounts of money you are considering investing, it would be well worth having a session with a financial adviser to see if there is a better option.
ASK STEVE WEBB A PENSION QUESTION
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Since leaving the Department of Work and Pensions after the May 2015 election, Steve has joined pension firm Royal London as director of policy.
If you would like to ask Steve a question about pensions, please email him at firstname.lastname@example.org.
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
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If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.
If you have a question about state pension top-ups, Steve has written a guide which you can find here.