By David Watkinson – WatkinsonBlack
ONE thing that has become clear over the past couple of years, and particularly in the last 12 months with the horrendous increase in the cost of basic needs such as power and fuel, is the inadequacy of the basic state pension in providing a comfortable standard of life.
The full new state pension is £203.85 per week, and this can be reduced if you have a shortfall in your national insurance contributions record. This is substantially less than the National Living Wage for anyone over 22 years old who works for 19 hours a week or more. Despite this, the rumours that the “triple lock” protection of the state pension may be removed are getting louder, and if this happens then it will only have the effect of reducing the level of increase of future pensions.
The government have seen Workplace Pensions as being at least part of a solution to poverty in old age. With some minor exceptions, for the past few years all employers have had to provide a workplace pension for employees in the UK who are both aged between 22 and the state pension age and who also earn at least £10,000 per year. However, even if you fall into one of the exceptions an employer cannot refuse to enrol you if you so request, although they do not need to make any employer contributions if you earn less than £6,240 per year. The choice of pension provider rests solely with the employer.
The amount that the employer and the employee pay into a workplace pension depends on the individual scheme. However, all schemes must meet the minimum requirements which are currently:
– The employer pays 3%, and the employee pays 5%,
– On all earnings between £6,240 and £50,270 per year, or £120 and £966 per week.
Any employee can “opt out” of a workplace pension. However, any decision to do so should be carefully considered. Obviously, opting out will stop you paying your 5% into the pension scheme. However, this may come at a considerable cost. WatkinsonBlack are not authorised to provide investment advice, and therefore the following points are for information and general guidance only. Any further advice specific investment advice required should be obtained from an independent authorised source.
Firstly, and very importantly, opting out will directly lead to your income in retirement being reduced.
Secondly, whilst your immediately net income will be increased, this will be at the cost of a substantial reduction in your gross pay. By opting out you will not only “save” your contributions of 5% but will also remove your employer’s obligation to pay their 3%. There is no obligation on your employer to pay this to you instead.
Thirdly, as usual you will receive tax relief on your contributions. This can be given in a number of ways, but if by means of a salary sacrifice then you will also reduce your national insurance contributions. This means that the increase in your net pay by opting out may be significantly less you might think.
Fourthly, the reduction in your net pay of joining the workplace pension may:
– mean that you become entitled to tax credits, or to an increase in the amount of tax credits received; or
– mean that you become entitled to an income-related benefit, or to an increase in the amount of benefit received.
It might also remove or reduce your liability to make student loan repayments.
Finally, some people may worry about losing any benefit from their pension if they die before they retire. This need not be a problem as you can usually nominate someone, such as your spouse or civil partner, to receive the benefit of your pension pot. Details of how to do this can be obtained from the pension provider chosen by your employer.
WatkinsonBlack have considerable experience in all areas of taxation and business services. This includes providing a very cost-effective payroll bureau service, as well as assisting to ensure compliance with the latest Making Tax Digital legislation. If you are employed or self-employed either as a sole trader, partnership or limited company and want to arrange a no-obligation initial meeting on any taxation or accounting matter then please contact us by telephone on 01925 413210 or by e-mail to [email protected].
Please note that these ideas are intended to inform rather than advise and you should always obtain professional advice before taking any action.
