Did you know that you can use your workplace pension to immediately double your pension wealth? It’s down to the incredibly generous tax and auto-enrolment rules. The rules mean that it will only cost you £80 to contribute £160 a month to your workplace pension scheme. Over a year, the £960 you contribute to your workplace scheme will immediately double to £1,920.

In this article, I take a look at how workplace pension schemes work and why using one gives such a massive boost to your pension wealth.

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Auto-enrolment pension rules

Auto-enrolment pension rules mean that all employers now have to provide a workplace pension scheme for all employees over 22 years old who are earning more than £10,000.

The rules mean that employers have to contribute at least 3% of your qualifying salary into your workplace pension. Under the rules, you will need to pay 5% into your workplace scheme.

Tax relief rules on pension payments

The tax relief rules on pensions mean that the government tops up your contributions by at least 20%. That’s because you don’t pay Income Tax on any pension contributions and most people pay 20% Income Tax. It will only cost you £80 to contribute £100 to your workplace scheme – the government will add the extra £20 as tax relief.

If you’re a higher earner and you pay 40% Income Tax, then the pension tax relief rules are even more generous. If your workplace pension is paid from your gross pay (before tax) then you’ll have your contributions topped up by 40%, so it will only cost you £60 to add £100 to your pot.

How to double your wealth

The pension rules mean you can use your workplace pension scheme to immediately double your pension wealth. Here’s a scenario to show how it works:

1. You earn £24,000 per year or £2,000 per month before tax.
2. You contribute £80 per month to your pension scheme (5% of your earnings).
3. The government adds £20 tax relief to your scheme.
4. Your employer adds £60 to your pension pot (3% of your earnings).
5. You have only contributed £80, but it has immediately doubled to £160 (£80 + £20 + £60).
6. By the end of the tax year, you have £1,920 in your pot but it has only cost you £960 in contributions.

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Other benefits of contributing to a workplace pension

Paying into a workplace pension can seem like a long slog, but there are lots of other benefits, as well as the extra government and employer contributions. Here are some of those benefits:

• You’ll be able to take the first 25% tax free when you come to draw your pension.
• You can choose investment funds within your scheme. You’re not restricted to the default fund.
• You will have a lot of flexibility when it comes to drawing your pension. Some people choose to buy an annuity and others choose to leave it invested or take a regular income drawdown from their pot.
• If you die with money in your pension pot, then this money will usually pass to your beneficiaries outside your taxable estate without attracting inheritance tax.
• If you die before you are 75, then your beneficiaries often won’t have to pay Income Tax on any money still in your pension pot.

The post Use this simple hack to double your pension wealth during 2022! appeared first on The Motley Fool UK.

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