As a specialist payroll umbrella company for interim managers, board and management level consultants and senior independent professionals, we speak to many individuals who are looking ahead to retirement and are unsure about what working through a payroll umbrella company means when it comes to pension contributions.

The good news is that when working through a payroll umbrella company, you have many options for saving into a pension scheme, and one of the key benefits of using Competex Pro in particular is that unlike many other payroll umbrella companies, we allow you, the contractor, to contribute to a private pension scheme of your choice via salary sacrifice, should you wish to.

In this blog, we look more closely at the two different ways of saving into a pension, namely Automatic Enrolment (or Auto Enrolment) and private pension contributions. We explore what these processes look like, and how each can benefit you in the long term.

What are Automatic Enrolment pension contributions?

In accordance with UK law, your employer (in this case your payroll umbrella company) must automatically enrol you into a pension scheme and make contributions to your pension if all of the following apply:

  • You’re classed as an employee.
  • You’re aged between 22 and state pension age
  • You earn at least £10,000 per year.
  • Ordinarily, your place of work is in the UK.

However, you’re able to opt out of Auto Enrolment pension contributions should you decide you do not wish to pay into a pension or if you would like to contribute to a private pension scheme.

What happens when you’re automatically enrolled?

Your employer or payroll umbrella company will write to you when you’ve been automatically enrolled into their workplace pension scheme (Competex Pro’s selected provider is NEST) and will provide you with the following information:

  • The date they added you to the pension scheme.
  • The name of the pension provider.
  • How much they’ll contribute and how much you’ll have to pay in.
  • How to leave the scheme, if you want to.
  • How tax relief applies to you.
How much is the auto enrolment contribution?

In most automatic enrolment schemes, you’ll make contributions based on your total earnings between £6,240 and £50,000 a year before tax. Your total earnings include:

  • Your basic pay
  • Bonuses
  • Overtime
  • Statutory sick pay
  • Statutory maternity, paternity or adoption pay

From April 2019

Employer contribution from total earnings = 3%

Employee contribution from your gross pay = 5%

Total contribution = 8%

For an explanation of how your pay is calculated, and the key terms, check out our infographic below.

In some schemes, your employer has the option to pay in more than the legal minimum, which means you can pay in less as long as your employer puts in enough to meet the total minimum contribution. It’s important that you discuss this with your employer before agreeing to be auto-enrolled.

What if I don’t want to be auto-enrolled?

If you’re eligible to be auto-enrolled and wish to opt out of your employer’s workplace pension scheme, you can do so after you have been automatically enrolled.

If you choose to opt out of the scheme within your first month of being automatically enrolled, you are then treated as if you had never joined the scheme, and any money paid in is refunded to you in full. You only receive back the payments that you are deemed to have made and you’re not entitled to receive the contributions your employer may have made or any tax relief the Government has paid.

What benefits would I lose if I opt out?

If you’re thinking of opting out, or stopping contributions, you may be missing out on valuable retirement benefits such as:

  • ​The contributions that your employer makes into your pension pot.
  • The tax relief that the Government adds to contributions that you make into your pension pot.
  • Any benefits that your scheme may pay if you fall ill and are unable to continue working before reaching your retirement date.
  • Any benefits that the scheme might pay to your dependants if you were to die.

We, at Competex Pro, are not qualified to offer advice regarding a suitable pension scheme or whether it is beneficial to opt-in or out of the auto-enrolment. If you require assistance in choosing a suitable scheme, we recommend that you seek the advice of an independent financial advisor.

What is a private pension scheme and what are the benefits?

When employed by Competex Pro, you also have the option to opt in with a private pension provider of your choice, and contribute via salary sacrifice (explained below). These contributions can be instead of, or in addition to, Automatic Enrolment pension contributions.

The main benefit of a private pension is that the contributions are chosen and planned entirely by you, rather than by your employer. Regular monthly payments and one-off contributions are available, and your pension provider will add tax relief on your behalf.

Can I contribute to my private pension scheme via salary sacrifice?

Competex Pro is able to offer you the ability to contribute to your personal pension scheme via ‘salary sacrifice’. This simply means that you sacrifice part of your total earnings to be paid into your pension by your employer, before any other deductions, such as Employer’s National Insurance, Employee’s National Insurance and Income Tax are made. This results in a lower percentage of your rate that is subject to deductions and more savings for you in the long run.

As with automatic enrolment pension contributions, Competex Pro is not authorised to advise on appropriate levels of private pension contributions, and you are recommended to consult your independent financial advisor when exploring your options, who will be able to advise you based on your particular circumstances.

Where is my money invested?

The money you put into your personal pension will usually be invested in a range of assets like shares, bonds, property and cash. When you start your pension, you’ll most likely be provided with a choice of pension funds to select from, based on how much risk you’re willing to take.

When you reach the age of 55 (57 from 2028), you can take your private pension as a lump sum, use it to buy an annuity (a guaranteed income) or leave it invested and take out cash amounts when you need to.

What is tax relief?

When you pay into a private pension, you qualify for tax relief. Your provider will automatically claim this at the basic rate and add it to your pension pot – you won’t need to do anything!

Tax top-ups are based on 25% of the contributions that you make, which means that if you pay £100 into your pension, HMRC then adds another £25, bringing your total contribution to £125. Higher and additional rate taxpayers can claim a further 25% and 31% respectively through their Self-Assessment tax returns. For 2020/21 you can get tax relief on your pension contributions up to 100% of your salary or £40,000 (whichever is lower). The £40,000 annual allowance is reduced if your ‘threshold income’ exceeds £200,000. Threshold income means all taxable income less any pension contributions made personally by you.

How do I choose a private pension scheme that is right for me?

There are hundreds of private pension schemes on the market and choosing between them can often be confusing and time-consuming.

Here are some things to think about when choosing a private pension scheme:

  • Use a comparison website such as the Money Advice Service to find providers and compare pension products.
  • Compare products from different providers. Ask for the key facts document which includes a summary of all the important facts about the pension plan.
  • Make sure you can afford the contribution! There may be a minimum payment and often or not, contractors do not earn a regular income due to their assignment changing or ending.
  • Check whether you can amend the contributions based on your assignment.
  • Check what charges you’ll have to pay and when. These can include administration fees, transfer charges, charges for managing your investments, penalties if you miss a payment or take your pension early.
  • Look at how the funds will be invested and what choices you have.
  • Seek advice from an independent financial advisor.
  • Don’t sign anything until you’re completely happy!
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