National insurance contributions
What are the key considerations for pension
planners? If you are one of the 8.5 million people
working on a part-time basis, the first thing to consider is the new state pension, as what you receive is entirely dependent on your national insurance record.
You need to have 35 qualifying years of national insurance contributions in order to receive the full new state pension, which is currently worth £164.35 per week. If you have fewer years on your record, you will receive less – in fact, if you don’t have at least 10 years of contributions, you won’t receive anything at all.
Things can get a little complicated when it comes to whether you have notched up qualifying years though. National insurance is only classed as being payable if you earn above the lower earnings limit, which currently stands at £116 per week or £503 per month. But you only have to actually make those payments if your salary is above the primary threshold, which is £162 per week or £702 per month.
If your salary falls between those two points, you won’t have to pay any national insurance contributions, though your national insurance record will still be credited.
If your salary falls below the lower earnings limit, you don’t pay any national insurance contributions, but your record isn’t credited either.
You can make voluntary additional national insurance contributions to improve your record and therefore receive a larger state pension when you retire. These payments can cover the previous six tax years. The government suggests talking to the Future Pension Centre
to find out if these extra contributions would help boost the size of your state pension.
Thanks to the government’s auto-enrolment initiative, employers are required to open a pension on behalf of their staff, and then contribute towards it.
If you meet the following criteria, you will be automatically enrolled in a pension by your employer:
- Be at least 22 years old
- Not yet be at state pension age
- Earn a salary of at least £10,000 per year
- Work in the UK under a contract of employment.
Even if you do not meet that criteria, you may be able to join your employer’s workplace pension, though they may not add their own contributions on top. It’s always worth asking.
In the current tax year, employers are required to contribute at least 2% of the employee’s salary into the pension, with 3% coming from the employee themselves, so 5% in total. From April 2019 this increases to 3% from the employer and 5% from the employee, a total of 8%.
Workers can opt out of the workplace pension if they choose, but so long as they meet the eligibility criteria, they will be re-enrolled after three years
Working more than one job
If you have more than one part-time role, each of your employers will assess your circumstances to see if you are eligible for their workplace pension scheme. Even if you do not meet the criteria, you can ask to join each scheme.
If you have a number of pensions in your name, it may be difficult to keep track of them all and how they are performing. The government plans to introduce a pension dashboard, an online portal which will bring together the details on your various pensions, to make it easier for savers to get an idea of their overall pension position. The first dashboard will launch next year, though it will be incomplete at first, as it won’t include the state pension.
One option may be to consolidate your various pensions
into a single pension plan. This will certainly be easier in terms of keeping track of performance, while it should also reduce the amount you are paying in fees.
There are potential downsides to consider though. For example, you may incur exit fees. You may also be giving up benefits attached to existing pensions, such as a higher than normal tax-free lump sum or a guaranteed annuity rate. It’s a good idea to talk to an adviser before making any decisions.
Which will be the best pension option for me?
If you do not meet the eligibility criteria for your employer’s workplace pension, then you may prefer to start a personal pension of your own.
Part-time workers have a range of options here. The simplest will be stakeholder or personal pensions, though if you feel more confident about making decisions about precisely how your pension savings are invested, you could go for a self-invested personal pension (SIPP).
While SIPPs are more flexible, as you can invest in a wider variety of assets, they tend to come with higher charges. “Having more choice is only beneficial if you then make the right decisions,” points out Patrick Connolly, financial planner at Chase De Vere
There is no single answer to which of these pensions will best suit a part-time worker. It will come down to their individual circumstances and how they want the money that they squirrel away to be invested.
Moving into full-time employment
If you move from part-time work back into full-time employment, this will have an impact on your pension pot.
For example, it may mean that you are now eligible for your employer’s workplace pension. If you are already enrolled in the scheme, the increase in your salary will mean both you and the employer are making larger overall contributions to the pension.
As full-time employment brings with it a larger salary, you may be in a position to put a larger slice of your income away in your pension pot. Not only is pension saving one of the most tax-efficient ways to use your money, thanks to the tax relief from the government, but the extra money you put aside will make a real difference to the eventual size of your pot when you come to retire.