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How You Can Make The Most Out Of Your Workplace Pension

Auto-enrolment has made a big difference the workplace pension landscape in many important ways and with the right advice allows you to make the most out of your workplace pension. Firstly, by 2018 it will be legally required for every employer to offer a workplace pension scheme to its employees. Every employee over the age of twenty-two who earns at least £10,000 will have to be enrolled on a workplace pension scheme.

Along with the government state pension, this means the majority of UK people will enter retirement with a number of income streams.

But for many, relying on the government state pension and the pension pot generated by auto-enrolment will represent a significant drop in their annual income, and may not be conducive to the kind of lifestyle they have been used to and want in retirement. Saving into a personal pension plan is an obvious retirement strategy to remedy this, but are there alternative workplace pension options that can be explored?

Auto-enrolment

If you have been enrolled in a workplace pension scheme by your company, you will have pension contributions deducted from your monthly pay.

Your employer will also make a regular contribution to your retirement pension, and the government will provide pension tax relief on a portion of the pension contribution.

The auto-enrolment pension legislation sets a minimum level of financial contribution (relating to a percentage of the employee’s earnings) that each involved party must make, that is set to rise over the upcoming years.

 

Date

Minimum employee pension contribution

Minimum employer pension contribution

Before April 2018

1%

1%

April 2018 – April 2019

3%

2%

After April 2019

5%

3%

 

An employee or employer can choose to contribute more than this if they choose. Potentially 8% may seem like a sizeable chunk of your earnings, but it is worth going over the financial numbers and doing some future projections to see how much it is likely to give you over your working life.

Contact our Warrington IFA, Wilmslow IFA, Altrincham IFA or Knutsford IFA team today for advice on any part of retirement planning.

Beyond auto-enrolment pensions

While auto-enrolment pensions provides some assurance that the majority of employees in the UK are actively contributing to a workplace pension scheme, it does not mean that there are no other options to be explored.

It is critical to note that an individual is always able to opt out of the workplace pension scheme their company has chosen. Some people may want to look for saving options to utilise alongside auto-enrolment pension schemes while other people may want to be in sole control of what kind of pension scheme saving they are doing.

As always, it is important to consult a local professional financial advisor when engaging in retirement planning regarding a matter as important as your future retirement income.

Salary sacrifice scheme

A salary sacrifice scheme is an arrangement whereby an employee and their employer agree to change the terms and conditions of their employment contract in order to reduce the cash entitlement of the employee.

This sacrificed cash entitlement is usually made in return for a benefit of some kind. A good example of a salary sacrifice scheme are those relating to childcare vouchers.

Entering into a salary sacrifice scheme arrangement could mean an individual’s entitlement to contribution based benefits such as the state pension is affected.

If an employee sacrifices some of their monthly cash entitlement, the employer can (if the pension savings scheme permits them to do so) invest the whole entitlement into a workplace pension fund. The employee will have no income tax or national insurance liability (NI liability) on the invested pension scheme amount.

Contact Assured Wealth & Estate Planning about your workplace pension scheme options today.

Group personal pensions scheme

An employer can offer employees a group personal pension scheme (GPP), which even though it is a type of personal pension saving scheme can still be arranged by them.

The contract for the GPP schemes are between the employee and the contract provider, but a company can choose to contribute into the scheme. There is no obligation for them (as long as the GPP scheme is not their auto-enrolment pension scheme) to do so and they can set their contributions at any level they wish.

GPP schemes are often offered in volume to employers for a discount which may in turn lead to lower management charges than individual personal pensions.

GPP schemes are flexible, in that you can continue to contribute even after you change jobs or transfer the pension pot into a new pension arrangement with your new employer.

Stakeholder pension schemes

Stakeholder pension schemes are a form of defined contribution personal pension. The government has a set of minimum standards for these pension schemes that mean that they have limited management charges, low minimum monthly contributions, flexible contributions and charge-free transfers.

Again, your company may choose to contribute to the pension scheme. Other people can also choose to contribute and you may contribute to other people’s pension schemes.

The company providers of stakeholder pensions are often insurance companies or investment platforms and contributions are usually invested in stocks and shares.

Pension contribution limits

There is no legal limits to the number of different pension schemes that a person can enrol to, but there are limitations on the total amount that can be contributed to all pension schemes in a given year.

The annual pension allowance

The limit placed on the pension amount that a single individual can put into defined pension contribution schemes is called the annual allowance.

The annual pension allowance is currently £40,000 but a lower pension allowance limit applies to some people who have already started to draw from their pension. The pension allowance also includes contributions made by your employer or anyone else that contributes to a pension scheme on your behalf.

Exceeding the personal allowance will result in a charge and a loss of any tax relief on pension contributions that exceed the limit. The charge will be added to your annual taxable earned income for the year in question, which may then have further knock-on effects on your tax liability.

It may also be possible to bring forward unused personal tax allowances from the previous three tax years.

Tapered annual pension allowance

As of April 2016, high-income earners have seen their entitlement to the annual pension allowance reduced.

For every £2 of earned income above £150,000 a year, the individual’s annual pension contribution allowance is reduced by £1. The maximum amount that the annual pension allowance can be reduced by is £30,000, meaning that a person with £210,000 of annual income is likely to have an annual allowance of £10,000.

The money purchase annual allowance

If you have s tarted to draw a regular income from a pension savings pot and still want to pay extra contributions into a defined contributions pension scheme, a reduced annual pension allowance of £10,000 will apply. This is known as the cash/money purchase annual allowance (MPAA).

The MPAA will apply if you happened to have withdrawn 25% of your pension pot tax-free and includes pension contributions made by you, your employer and any other individual.

It was announced in Autumn Statement 2016 that the MPAA would reduce to £4,000 by April 2017.

The MPAA comes into effect the day after you withdraw the 25% pension lump sum and unused pension allowance cannot be brought forward from previous tax years.

While pension auto-enrolment means that the majority of employees will now have regular savings going into their workplace pension scheme, however, it does not mean that there are not important decisions for the individual to make. Taking an active, hands-on approach to retirement planning is as important now as it ever was.

Our Altrincham Estate Planning, Warrington Estate Planning, Knutsford Estate Planning or Wilmslow Estate Planning specialist can provide guidance during any part of the retirement planning process.

Important information about this Make The Most Out Of Your Workplace Pension article 

The way in which personal tax charges (or tax relief, as appropriate) are applied depends on upon individual personal circumstances and may be subject to change in the future.

This Make The Most Out Of Your Workplace Pension document is solely for your own information purposes, and nothing in this article is intended to constitute advice or a recommendation.

While considerable care has been taken to ensure that the information contained in this Make The Most Out Of Your Workplace Pension document is accurate and up to date, no warranty is given as to the accuracy or completeness of any pension planning information.

 

 

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