CASE STUDY: JOE *
Let's take a fictitious example of Joe. The contributions to Joe's workplace pension are worked out as a percentage of his "qualifying" earnings (anything Joe earns between £5,654 and £42,475 before tax).
Joe earns £24,000 a year including overtime and bonuses (£2,000 a month).
His qualifying earnings are £18,436 a year, or £1,536 a month (Joe's "qualifying earnings" is calculated by deducting £5,654 from £24,000).
The government has set minimum levels for what has to be paid in by your employer and what is contributed in total. His employer's pension scheme uses the following percentages to calculate the contributions:
Joe's contribution – he pays in 4% of his qualifying earnings.
Employer's contribution – an amount equal to 3% of Joe's qualifying earnings.
The government's contribution – in the form of tax relief, is equal to 1% of John's qualifying earnings.
Joe pays in 4% of qualifying earnings which equals £61 a month.
His employer pays in a minimum of 3% which equals £46 a month.
The government, in the form of tax relief on his payment, pays in £15 a month.
Therefore, although Joe only puts in £61 a month, the total contribution to his pension is £122 a month.