When payday arrives at the end of April, millions of employees will be taking a big step towards a more financially secure future .
That’s because the government has changed the law and both employees and their employers will now be paying more into their pension.
There has been a fair bit of mixed news coverage about this change, so we’ve set out to explain what it all means and why, on the whole, we think this is a really good thing for everybody.
Unfortunately, nothing has changed for the self-employed who still don’t get a pension set up for them automatically (but they’ll soon be able to do so in just 5 minutes with a Penfold Pension!)
If you’re self-employed, you can request early access to the Penfold Pension by e-mailing us at firstname.lastname@example.org
Here’s our take on the changes happening this month:
You’re getting more money overall, but a little less goes in your bank account
It’s not a pay cut – your salary stays the same, but more of it is being diverted from your bank account to your pension pot, and in the long run, this could very well be worth it. Your pension pot is still your money (no-one else can spend it), but its specifically set aside for when you’re older and stop working. On top of that…
You’re actually getting a pay rise from your employer
Previously your employer would pay in 2% of your salary into your pension pot. Now, they’ll pay in 3%. That’s a 1% pay rise!
You’re getting a tax cut anyway
From April, you can now earn £12,500 before paying any income tax – that’s £650 more than you could earn last year, so you should pay at least £130 less tax this year. For many workers, this should almost – if not entirely – make up for the money that is now paid into the pension, so there is no real reduction in take-home pay overall
You don’t pay tax on pension contributions
If you are now paying £125 into your pension each month but decided to take it as salary instead, you’d only get £100 more in your bank account anyway! Money is worth more when it’s paid into your pension because pension contributions are tax-free.
You do pay tax when you take the money out (after you turn 55), but overall you pay a lot less because the first quarter of that money is taken out tax-free. (The £125/100 exact amounts will depend on your tax bracket)
You need to be saving anyway
The state pension is only (about) £8,767 a year and this probably won’t be enough to live on when you are 68 and older. So you’re going to need another source of income and most people think a private pension is a good way to provide that!
But if you’re self-employed, this doesn’t apply to you
These changes only impact people who are saving via a workplace pension, which means that anyone who is self-employed or a freelancer won’t be paying anything into a pension unless they’ve set one up themselves. That can be a bit difficult, but Penfold is trying to make it easier and is launching a pension just for them – If you’re interested, you can request early access to the Penfold Pension by e-mailing email@example.com .