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How to get your hands on some free cash

If you put the effort into saving some money, your employer and the government will reward you, says author of ’No Spend Year’.

 
How to get your hands on some free cash
 

If I offered you some free money, I’m pretty sure you’d take it, in fact I don’t know anyone who would turn it down. However, there’s a good chance you’ve already turned your nose up at some free cash, and you may not even know it.

Let me explain where you get this free money from and how you get your hands on it. It’s all to do with pensions (stay with me, I know they’re boring).

If you work for a company then, by law, they have to put you into their workplace pension if you earn over £10,000 a year and are aged over 22. This is known as ‘auto-enrolment’ as you are automatically enrolled into your workplace pension scheme and your employer will take money from your pay packet each month and pay it into your pension.

You have got the chance to opt out of the pension scheme but every three years you will be auto-enrolled back in and have to opt-out again (the government really wants you to save).

But it’s by making the decision to opt out that you also give up free money.

Under the auto-enrolment rules, once you’re in the pension you pay in a set amount of your wages - currently 1% - and your employer adds another 1%, and the government gives you a little top up as well (totalling 0.2%) in the form of tax relief.

If you agree to pay into a pension your employer has to pay in and the government will give you a reward for paying in too, but if you opt out your employer doesn’t have to put anything in and the government definitely won’t give you anything.

The government wants you to put some money away for your old age which is why it offers savings incentives.

And you’d be crazy to give up that free money from both your employer and the government. Let’s be honest, how much of a state pension are people in their 20s and 30s really going to get? And are we going to have to wait until we’re 80 to get it?

You have to start taking responsibility for your retirement because there’s a dwindling level of support to rely on from the government.

It might seem like a stretch on your wages putting away money each month but the money for your pension comes out before it hits your bank account so you soon adjust (a bit like your student loan, it’s already discounted before you get your wages).

Of course, if your payment into your pension means you genuinely can’t afford your bills then think about opting out but if you can afford to pay into a pension then you should do so.

At the moment the auto-enrolment contribution - the amount the government makes you pay into a pension - is low; in all honesty, saving 1% of your wages isn’t going to give you a retirement of cruises around the world. The government knows this and so has set out a plan to increase the amount you and your employer have to contribute.

By 2019, the contribution levels will be increased to 8%, made up of 4% employee contribution (what you put in), 3% employer contribution and another 1% of tax relief.

This is a much healthier level of contribution although arguably still too low (but that’s a discussion for another day). You may not like the idea of 4% of your wages being saved for you - especially if you don’t even want to put 1% in - but hopefully by the time the contributions tick up automatically you will have had a pay rise or will be in a better financial situation to cover the cost.

If you decide to opt out of your workplace pension when the contribution rates go up, then you’ll be giving up even more free money because your employer contribution and the government top up increase too.

I know that retirement seems like a long way off, and it probably is, but that’s a good thing. You have loads of time to save for it and if you start putting away 1% of your wages now,  adjusting your finances to handle the inevitable creep up in contributions, and importantly staying in your workplace pension, it will pay off.

Just that one small change that will get you into the savings habit for life is the difference between a retirement spent enjoying yourself and one spent in poverty.

When you get to old age and you’re enjoying yourself, you’ll thank your younger self for claiming that free cash. 

10 comments so far. Why not have your say?

Rob Walker

Feb 02, 2017 at 18:31

You could, of course, also pay a standing order into your SIPP and then buy shares / bonds etc from time to time with the cash accumulated. You have to claim that back from the taxman as well, of course, but at least you have full control over what you are investing in and you are not supporting those fat cats who 'sold' their pensions service to your employer and then creamed off their route opaque commission / charges etc in quite the same way as the more straightforward SIPP administration charge.

Then if you've lost your job, your wife's left you and you run out of money, you can stop that standing order, but that pension pot in your SIPP will keep on (maybe) growing and you can resume adding to it when the next job comes along.

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Anonymous 1 needed this 'off the record'

Feb 03, 2017 at 08:28

All very well in theory Rob, but if you opt out of your employer's pension and invest in your own SIPP you miss out on the employer's contribution, which is generally more than the tax relief. Most employers won't contribute into your SIPP.

Besides, the employer pension schemes these days are effectively a stand alone SIPP anyway, so if you leave that employer you can just transfer what's in the pot and consolidate it into your own SIPP.

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Rob Walker

Feb 03, 2017 at 10:14

Fair point Michelle but with modern day work patters in and out of 'self employment' zero hours and the rest there is a good case for looking after your own independent future.

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Raj K

Feb 09, 2017 at 14:34

1% is a really low amount to be saving per month. I think people should be aiming to put away at least 10% of their salary into a pension scheme.

Id rather control my own pension, select the stocks and it will probably grow at a higher rate then a bunch of people who get their fees regardless of performance.

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Rob Walker

Feb 09, 2017 at 15:53

Maybe RajK but would you pay 10% in and deny your family a holiday? Would you pay that 10% and not move into a bigger house for your growing family? Ultimately these pension 'targets' just guilt-trip all the under-subscribers into wishing they had a bigger pension pot when, in reality, they should be getting the most out of life right now. You get a bigger pension pot if you start saving earlier but what you sacrifice out of your salary between 50 and 60 is probably a lot less than between 30 and 40. We never get that rational argument from a financial services publicist, just the usual sales patter.

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Raj K

Feb 09, 2017 at 19:17

That is a fair comment Rob and i apologise if i have offended. Everyone will have different ability to contribute to a pension at various time in their life. Of course the things that you mention are things we all like to enjoy!

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Rob Walker

Feb 09, 2017 at 19:21

No offence taken! Just pointing out that those selling pensions have a one-dimensional view and assume that there cannot be anything better than putting 10% of your hard-earned cash into a pension. For those who at times don't even have 1% spare, this 'advice' just adds to the feeling of inadequacy.

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Norman E

Feb 27, 2017 at 12:35

This is not an either/or decision. The wise employee stays in and gets the employer contribution and tax relief. Effectively for every £100 he contributes he gets another £100 from his employer and £20 added by the Government. But the wise employee also recognises that even the effective 2.2% of his salary going into a fund is not going to buy him a huge pension, so he sets up a SIPP and puts whatever he can afford into that as well.

I had an occupational final salary pension (those were the days) but as a late entrant to it I knew it would not be very large especially as I always intended to retire early, having seen my own father hang on to work past 65 and then die within a year or so of retiring, so I paid for an additional pension. Its not huge, but between the two pensions I have enough and those in work today need to reconsider their spending priorities to avoid having an impoverished retirement. Those who buy all the latest "must have" gadgets and put nothing into savings will regret it later.

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Leigh Moss

Mar 05, 2017 at 08:57

At 55 I had enough to retire when the company I worked for closed down. I decided to continue working and since then I have had several temporary jobs. The problem I am finding is that after 6 months the companies I have been working for on a temporary bases keep auto enrolling me in to their pension. It would be nice if they asked if I wanted to opt out before enrolling me. I now have my main pension which is a SIPP, a Nest pension and a Royal Mail pension. The latter two I did not want. My contract ends with RM in 6 weeks so I am likely to work for another company on contract. Potentially after 6 months with them I could end up with another pension fund opened on my behalf.

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Norman E

Mar 06, 2017 at 08:59

Can you transfer the pensions you don't want?

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