Auto enrolment – don’t miss out

Auto enrolment – are your employees thinking of opting out? Make sure they understand what they could be losing.

Employees who have been auto enrolled into a workplace’s pension may have found that they are taking home less pay. Opting out is a choice, and it may seem in the short term that this is something employees want to do (to increase their take home pay again) especially as the contribution rates are increasing from April 2019 (see below).  However, before an employee  opts out of the workplace pension, they should carefully consider whether this is the right thing to do in the medium/long term.

April 2019 auto enrolment rates:

Point 1: If an employee is auto enrolled (and doesn’t opt out) the employer has to contribute to their pension scheme too – which is in effect “free money” (albeit paid into something they cannot immediately access).  If an employee is not in the pension scheme the employer does not have to contribute – so the employee would truly lose out.

Point 2: the contributions into the pension scheme will be invested by the scheme provider so (the intention is) the sum invested will grow.  And that growth will also grow so the pension returns will be compounded. There is a saying “you have to be in it to win it”.  If an employee doesn’t have a pension scheme then s/he cannot benefit from good investments (although it should be noted that investments can go down as well as up).

Point 3: under current rules, you can access your pension when you are 55 (although note that it is proposed that this age will rise to stay 10 years behind state pension age).  This can include taking 25% of the pot tax free.

Point 4: a pension scheme can provide for a person’s dependants in due course.

Point 5: pension pots are an incredibly tax efficient vehicle. Any growth or dividends paid to the pension scheme will be free from capital gains tax or income tax. Pensions also offer protection from IHT as the pension pot is not counted as being in a person’s estate (this is not a concern for some people as the IHT threshold is (broadly speaking ) £325k but many people do expect their net worth on death to be above this threshold and want to limit the amount of tax that is lost to the Government).  If a person dies before they are 75 they can pass their pension pot onto their beneficiaries without any income tax consequences; after 75 the beneficiaries can draw on the pension monies at their marginal rate of tax.

In short, pensions are overall an excellent idea, so if an employee can afford to remain auto enrolled in their employer’s scheme, then it is  a sensible decision for the longer term.  Pensions are, however, an investment vehicle so financial advice would need to be taken on specific investment decisions, and on decisions about what to do with the pension pot on retirement etc.  Employees being auto-enrolled into their workplace scheme should also make sure they understand the scheme rules and what their particular pension provider offers, such as how it will provide for their dependants.

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