One of the main benefits of a workplace pension is the ability to build up a retirement pot that you do not have to contribute alone, your employer is required to contribute too through automatic enrolment, helping you build your retirement fund faster.
Why have a workplace pension?
To have money, over and above, the State Pension
To allow you to retire early, before State Pension, if affordable
To save money, in a tax efficient environment, for the long term
To benefit from the employer’s contribution, 2%, (rising to 3% in April 2019).
To take advantage of compound interest over the long term
To minimise the cost of the pension scheme, compared to market alternatives.
Workplace pensions also include an element of contribution from your employer; think of it as a pay rise that you have not asked for. At present, your employer will be paying 2% of qualifying pay to your pension scheme, which will rise to 3% in April 2019. This is a near as you will get to free money; if you do not remain in the workplace pension scheme, you will not get the benefit of this contribution, as your employer is under no obligation to make payments into any other scheme.
The length of time your money is invested is a major element in the total fund available at retirement, as compound interest takes time to work but will have a significant positive contribution in a thirty-year working life. Optionally, you can join a workplace pension as soon as you start work, but you will be automatically enrolled if you are over 22 years old and earn more than £10,000 per annum. For maximum benefit, join as soon as possible. Albert Einstein is reputed to have said that compound interest was the ‘most powerful force in the universe’*; make it work for you! You will be able to access your retirement pot from the age of 55 (rising to 57 in 2028).
Any money you hold in a pension scheme is exempt of income tax and capital gains tax, so investment increases are maximised. For most people, who pay into their workplace pension scheme using payroll deduction, no tax is taken from pension premiums, so a £100 contribution costs the equivalent of £80 net pay. (For people paying 40% tax, a further 20% can be recovered from HMRC, up to the annual limits).
In general, workplace pensions are cheaper to operate than other alternative pension schemes . Stakeholder pensions, (the most basic Personal Pension Plans), have a maximum annual cost of 1.5% of funds invested. Workplace pensions has a fund charge cap of 0.75% for some funds, although some optional funds may cost more.
For members older than age 55, workplace pensions offer the ability to save in a greatly tax advantaged manner, compared to ISAs. Money paid into an ISA will be paid from your already taxed income, so start at a minimum 20% disadvantage compared to a pension contribution. Pension rules will allow you to access funds with 25% tax free and the balance taxed at your usual tax rate. These days, stocks and share ISAs and pension funds can contain the same investments at similar terms, so tax considerations become more important.
If you would like to read more on this topic, the Government body, the Money Advice Service, gives some useful detail on the benefits of automatic enrolment here.
Some sort of second pension is now held by 84% of the working population, so if you do not have one, you need to be sure that you are not missing out.**
How do I get professional advice on Automatic enrolment?
If you would like to discuss automatic enrolment or your wider retirement planning please contact us at firstname.lastname@example.org or call us on 01223 792 196. We’d be delighted to help.
About Martin-Redman Partners
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The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.