Employer contributions to personal pension: what you need to know

Margaret is 58 and has three pension pots with ReAssure, Prudential and Scottish Widows, worth £220,000 in total. She has been looking into employer contributions to personal pension plans as part of her wider pension consolidation strategy.

She has decided to take a staged step down from full-time work and has taken a part-time administrative job paying just over £10,000 a year. Retirement, almost.

Then HR got involved. A letter arrived telling her she had to join NEST, a hassle she was not expecting. What she did not realise at the time was that employer contributions to personal pension plans she already held were a very real option.

What is the NEST pension?

NEST stands for National Employment Savings Trust and is the government's auto enrolment scheme.

It makes it a legal requirement for employers to enrol eligible staff into a workplace pension. It is the largest workplace pension scheme in the UK by membership, with over 13 million members.

Around one in three UK workers saves with NEST. However, Margaret had no choice in the matter.

She wanted employer contributions to personal pension plans she already held, not another pot to manage.

A small NEST account was not going to add much to what she had already built.

A lesson learned the hard way

The author of this article knows exactly how pension pots get lost. Years ago he worked for Lovells for four years on a salary of £28,000 a year.

He assumed someone was setting up a pension for him. They were not. Thirty years later, a call to HR and his national insurance number confirmed the worst.

Lovells had never enrolled him. He was gobsmacked.

Four years on a decent salary and not a penny saved into a pension. And perhaps more importantly, thirty years of potential growth were lost.

He simply could not believe it. The second job was a different experience altogether.

At Taylor Woodrow he enrolled in an occupational pension scheme. Tracking it down years later meant contacting the trustees directly.

He knew a pension existed but had no idea of its value. He was pleasantly surprised to find a pot of just under £10,000 sitting there, which he transferred into a SIPP where he now makes his own investment decisions.

The Lovells experience is exactly why auto enrolment is a good thing. However, it does have a downside.

Every job change adds another pot. Different charges, different strategy. Over a working life that adds up fast. Fortunately, employer contributions to personal pension plans you already hold are a real alternative.

Margaret could ask her employer to pay directly into her consolidated pension instead, providing it met the qualifying criteria.

Employer contributions to personal pensions: are they actually allowed?

Yes. An employer can pay directly into a personal pension you already hold rather than signing you up to their default scheme. Most employers use NEST.

Nevertheless, as long as your existing pension meets HMRC's auto-enrolment qualifying criteria, your employer can redirect contributions, theirs and yours, straight into your existing plan.

The law simply requires that the employer demonstrate the employee pays into a qualifying pension. That is it.

Margaret spoke to HR and made her position clear. She wanted both her own contributions and her employer's to go directly into her newly consolidated Standard Life pension. HR confirmed that Standard Life is a compliant auto-enrolment scheme and agreed without any issues.

Margaret never needed to set up a NEST scheme at all.

What the process actually looked like

Regulated Advice spoke to Margaret by telephone and booked an appointment with a financial advisor covering her postcode and area of advice.

This is how employer contributions to personal pension plans get set up properly. The whole process took around three months.

During the first video meeting, the advisor completed the fact find. This is the compliance part of the process.

It covers Margaret's income, outgoings, existing pensions and her attitude to risk. A risk profile is essential as it determines which products suit her.

The advisor stated the fees clearly in that first meeting. Full transparency from the start. The advisor then sent a letter of authority electronically, and Margaret signed it online.

This allowed the advisor to write to ReAssure, Prudential and Scottish Widows to gather the full valuations.

In the second meeting, the advisor presented a full suitability report with a clear recommendation, which in this case was to consolidate all three pensions into Standard Life.

At that point, Margaret simply had to decide whether to proceed.

Clients can pay financial advisor fees either by invoice or by taking the amount directly from the pension balance.

Why employer contributions to personal pension work for Margaret

Margaret is not planning to fully retire for another five to seven years. Her part-time salary triggers auto-enrolment, which she finds frustrating given the size of the pot she has already built.

But instead of drip-feeding a token amount into a NEST account, those contributions now go straight into her Standard Life pension.

As a result, she has one pot, low charges, and a clear strategy for when she does retire.

The Standard Life pension is a modern flexible plan that offers income drawdown, something her older pensions with ReAssure, Prudential and Scottish Widows did not.

So in reality, she would have needed to transfer at the point of retirement in any case. By doing it now, she has simply got ahead of the curve.

Employer contributions to personal pension: the bottom line

To conclude, Margaret could have easily accepted the default position, which was to open yet another pension scheme.

Therefore, if you are starting a new job and already have a personal pension in place, it is worth asking whether your employer can pay into it instead.

You might be surprised how straightforward the answer is.