Personal finance expert Martin Lewis had revealed on his previous BBC Radio 5 podcast that people earning over £10,000 could be missing out on a free pay hike. During the podcast, Lewis highlighted two unbeatable pension 'superpowers,' which help employees boost their incomes: pre-tax contributions and employer contributions.
The expert explained the first superpower is contributing to a pension with pretax income, which allows you to save more than it costs you.
Assuming you are taxed at a 20 per cent rate for every £100 you earn, your take-home pay stands at £80. Since pension payments are made before taxation, you get to invest the complete £100 but lose only £80 in your pay packet. 'So effectively the tax relief is the difference - you get a £100 investment, and it only costs you £80,' Lewis had explained.
For those subject to higher taxes rates of 40% or 45%, they get to invest £100 in pensions and lose only £60 or £55, respectively, from their pay packets.
In all, Lewis thinks when you put post-tax money in normal savings and investments, the contributions have already lost that '£20 or that £40 or that £45 to the tax office' depending on your tax rate. Instead, putting the same money into pension before taxation offers a 'boost' for employees.
Decoding 'Hidden Pay Rise' Superpower
According to Lewis, the second benefit of contributing to pension accounts is that your employer is obliged to contribute as well, which he urged workers to 'not throw away.'
'So by law if you're an employee aged 22 to 66 earning over £10,000 you are automatically enrolled into a pension - in other words you are opted in to contributing without being asked. I'm a big supporter of this because it pushes people into good financial behaviour even if they're not sure what they want to be doing later in life,' Lewis had explained.
Those auto-enrolled in pension plans see employers make contributions to it as well, which is essentially extra salary. For a money purchase pension, Lewis said the minimum contribution stands at 8% on income, calculated on amounts between £6,240 and £50,270.
In this case, the employer must contribute a minimum of three percentage points of that. In short, adding that within 8% of a person's salary, 3% comes from the employer and 5% from the employee.
There are some employers who offer to contribute higher amounts, which is a 'huge boon and you're being paid more in total, although admittedly your disposable income is lower because of your contribution. You lose a little in the short run, but you gain a lot in the long run,' Lewis had mentioned.
'We'll start with the basic rate taxpayer. You put £100 in your pension but it only costs you £80. But because you've put £100 in your pension your employer has to add £60, assuming you're in the right level of earnings, so that would mean you're getting £160 a month of investment, but you're only losing £80 in your pay packet to do it. That is unbeatable - there is nothing else like it out there,' Lewis concluded.
