Save Some Money – Referral links to receive money off
Merry Christmas and welcome to the fourth post of my 12 Tips Of Christmas series.
These are a series of posts that will be going out on the lead up to Christmas and the New Year to help guide you towards a better money mindset with an aim to give you a base knowledge of personal finance.
Disclaimer – None of this contributes as financial advice. Please seek multiple sources and/or impartial, independent financial advice before making decisions.
You don’t get a lot in life for free. Everything comes at some cost in one form or another.
But there is way where you can get some money which is pretty much free; your company pension.
This requires a little long term vision to really realise how beneficial this small salary sacrifice in the short term will become, once you reach retirement age, in the long term.
By law, your company has to at least offer some sort of pension; they must automatically enrol you once you qualify (passing probation; age etc.); they must also contribute to your pension if you decide to pay into it.
The majority of workplace pensions offered nowadays will fall under the defined contribution (DC) category. There used to be many out there called defined benefit (DB) pension, but these are incredibly costly to the employer (and incredibly lucrative for the employee), and have since been phased out of many company pension offerings.
If your workplace pension is a defined contribution pension, you can set it so that a percentage of your pre-tax salary is taken from your monthly pay cheque and deposited into a pension scheme, which would have been set up by your employer, with a regulated financial company/ institution (Aviva, Legal & General, Prudential etc.).
Taking money from your pre-tax salary means you immediately save 20% on the tax you would have paid. No tax is paid on your pension until you withdraw it many years down the line, by which point it should have hopefully grown a lot larger through compounding.
As long as you contribute a minimum of 5% into your pension each month, your employer must also contribute a minimum of 3% on top of that, meaning your total contribution each month will come to 8%.
That’s essentially a 3% pay rise. That’s free money every month, guaranteed. PLUS the 20% tax relief you’ll receive from your contributions.
Many employers may even offer more than this. I’ve known one to offer 6% contributions from them, but as long as you contribute a minimum 4% yourself, they’ll top that 6% up to an overall 10%. Very generous. Make sure you’re asking your HR or payroll team for details about your pension so you know you’re making the most of this.
Once your contributions (including those from your employer) are added to your pension pot with your company’s chosen pension provider, this money is then typically invested in a fund. This is money pooled together by the fund manager – along with many other people’s pension contributions – who then invests that money into a number of companies in order for it to grow. It’s a way of spreading risk (risk is not a dirty word in investing), so when the share price of one company falls, there’s a good chance at least a number of others have risen.
With most pension providers, you’ll probably be able to choose your own fund/s to invest in. But you can just leave it in the default fund which will cater more for the majority rather than your specific circumstances. This may be fine, but just make sure you check which fund/s yours is in and literally Google the name of that fund. This will bring up the ‘fund factsheet’ where you’ll be able to see that funds top 10 holdings (companies it is invested in), as well as its asset allocation (does it also hold bonds or gilts?) and a percentage breakdown of which countries the fund is invested in.
At the time of writing, most pension providers won’t allow you to withdraw this money until 55. The only exception to this is terminal illness. Anyone saying they can help you withdraw this before this age is probably trying to scam you. Make sure you’re aware of these!
Your private company pension is separate from the state pension. It’s good idea to not rely on this totally as this could change by the time you come of age and may not cover your basic living costs.
Those who are self-employed may not have a company contributing some money, like the above examples, to their pension. They may want to open a SIPP (Self Invested Personal Pension) themselves. Despite not receiving a free boost from an employer, they would still get tax relief on any contributions made depending on their income bracket.