Hopefully, you will have both a personal pension plan or be part of a company pension plan, in addition to your basic state pension. Nowadays, relying on your state pension may not give you enough income to sustain your standard of living after retirement.
You will be making monthly, if not quarterly or annual, contributions to your personal pension plan. The government tries to encourage people to open a personal pension plan, by offering tax incentives for contributions. If you are part of a company pension scheme, then your contributions will be automatically deducted from your pay check prior to paying income taxes. If you are making contributions to a personal pension, the pension manager will make sure that your contributions will be tax-free.
Having said that, contributions to both personal and company pension schemes are capped at a certain limit. This is especially important to keep in mind if you are planning on topping up your personal pension with additional payments.
First off, there is a cap for tax-free pension contributions per year. This number is based on the amount you earn. Secondly, most personal pension plans also have a limit to how much you can contribute a year; this is again based on your annual salary. Check with your plan administrator what the options are for topping up personal pension plans.
For the state pension plan, your contributions are made as a percentage of your annual income in the form of National Insurance (NI) contributions. You can top up your NI contribution to a maximum of 15% of your annual salary. Also, you can easily check with the Department of Social Society, to see whether your contributions are up to date. If they aren’t, they can advise you on how you can top up your state pension to maintain eligibility for a state pension when you retire.
Also, depending on your individual circumstance, you may be entitled an additional state pension called State Second Pension. This scheme was introduced in 2002 and is aimed at people earning less than £26,600 to provide them with a more generous addition to the state pension. Contributions are made in addition to the basic state pension and payments are automatically included in your pension, when you reach retirement age.