I’m saving at the automatic enrolment minimum in my workplace scheme. Having just paid off my student loan,
I have extra cash each month
to invest. I’ve already got a decent buffer in place and own my own home.

Does it make sense to top up my workplace pension (I’m currently in the default fund) or should I consider setting up a SIPP instead? I’m 40 years old and don’t have any dependents.

Stephen

Tom Selby, AJ Bell Head of Retirement Policy says:

For most people who are prioritising saving for retirement, making the most of matched contributions in your workplace pension scheme should be your first port of call.

Under automatic enrolment rules, your employer must provide a workplace pension scheme and pay a minimum level of contribution.

In 2022/23 this minimum is 8% in total – 4% from the employee, 3% from the employer and 1% via pension tax relief. These minimum contributions are currently based on ‘qualifying earnings’, meaning that only salary between £6,240 and £50,270 counts.

This means, for example, someone earning £30,000 who was auto-enrolled at the minimum would only have their minimum contributions based on the band of earnings between £6,240 and £30,000. This would mean their total contribution for the year would be (£30,000 - £6,240) x 8% = £1,900.80.

It is generally accepted that contributions at the auto-enrolment minimum will likely fall short of delivering on lots of people’s retirement expectations. Saving above this minimum is likely to be necessary for millions of people.

Remember, 8% of qualifying earnings is just the minimum and plenty of employers will match contributions beyond this level.

If you haven’t made an active choice with your workplace pension about where your money is invested, it will likely be in a ‘default’ fund.

This will invest your money in a way that aims to provide a decent retirement outcome – although it won’t be built around your risk preferences or long-term goals. Charges for default funds are capped at 0.75%.

Some schemes will offer a single investment solution while others might provide different options outside the default (although these will not be covered by the charge cap).

If you want to top up your existing scheme with extra contributions and you are happy with your investments this should be possible – just speak to your employer.

Alternatively, you could open a self-invested personal pension (SIPP) with another provider and make extra contributions.

SIPPs offer a range of potential advantages, including allowing you to build a portfolio that suits your needs by choosing from potentially thousands of different investment options. SIPPs offer all the tax advantages of workplace pensions too. Although the 0.75% charge cap will not apply, portfolios can still be built at low cost.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not
provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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