It could be tempting to stop paying into your workplace pension, especially when you have to make difficult choices about your finances. But there are a number of important benefits you could lose if you choose to opt out of your workplace pension scheme.
While it's expected that most people who are automatically enrolled will choose to stay in their pension scheme, there's always the freedom to opt out. So why should you stay in your workplace pension?
Your employer pays in tooPensions are a form of deferred pay, especially when it comes to the money your employer pays in. Not only does your employer pay you a wage, they put money into a pension so you have income in retirement.
The amount your employer will put in varies. There’s a minimum amount they’re required to contribute by law, but many employers go further than this, particularly if you also increase your contribution. If you opt out of the workplace pension, it’s like turning down free money, because your employer will stop paying in as well.
You get help from the government through tax reliefWhen you earn money you pay income tax, usually at a standard rate of 20%, but at 40% or 45% if you're a higher earner. When you choose to put some of that money into a pension scheme, you no longer have to pay tax on it. What this means in practice is that, if you want to put £1 into a pension, it’ll only cost you 80p if you pay tax at the standard rate – the government puts in the other 20p.
For most high earners, the advantages could be even greater. For someone paying tax at 40%, it only costs them 60p, because the government contributes the other 40p. A combination of tax relief and a scheme where an employer matches what you put in means you could get £2 in a pension (one from you and one from your employer) at a cost to you of just 80p. There aren’t many investments that can match that.
People with a taxable income of more than £150,000 should seek further independent financial advice about their tax position when it comes to their workplace pension.
You get access to a tax-free lump sumLater in life, when you’re thinking about taking money out of your pension, you can usually take a quarter of the whole pot tax free. This means that you pay no tax on your contributions, get tax breaks on the growth of the money inside your pension, and then can take out a good chunk with no tax at the end. Again, there aren’t many investments that have a tax treatment as advantageous as this.
Your pension scheme may pay out to your loved ones if you dieThe main aim of a pension scheme is to provide you with something to live on when you’re retired. But many pension schemes will have additional benefits if you were to die or become seriously ill.
Some salary-related pension schemes will offer you something called ‘ill health early retirement’, where you can draw a pension before normal pension age if you can’t work. And most pension schemes offer some form of payout if you were to die. This can sometimes be a multiple of your annual salary, and can be very valuable to loved ones you leave behind.
You’ll have more choice over when to retireUltimately, the purpose of pensions is to replace your wage when you’re ready to stop work. The more you have in pension rights, the more choice you have about when you can afford to retire. There would be nothing worse than deciding you’re ready to stop work but realising you have to carry on – possibly for years – because you haven’t built up enough to live on.
Although it’s always tempting to boost your income today, it comes at a cost. Opting out now and giving up on the money your employer puts in will greatly reduce your pension at retirement and could mean that you’re still going into work long after the point when you’re ready to stop.
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