Published On: Sun, Apr 14th, 2019

Pension news: What are the benefits of auto-enrolment schemes? Should I pay in?


But with shocking figures from pensions advice specialist Portafina recently revealing over a third of Brits have no idea how much they are paying in each month, it is worth highlighting the benefits on continuing to save for your retirement. The minimum contributions for an auto-enrolment scheme have risen to eight percent, with employees now paying in five percent and employers contributing three percent. This is up from the five percent of contributions workers and companies were required to pay in last year, where employees contributed three percent and employers two percent. Here are some of the positives of putting away into your pension as the new contribution rates come into force, as divulged by wealth management business Quilter.

TAX RELIEF

Quilter pensions expert, Ian Browne, said one of of the biggest reasons to invest in a pension is the tax saving on offer.

This is because when money is diverted to a pension instead of going into your take-home pay, no income tax applies.

He said: “This means there is an immediate 20 percent or 40 percent uplift for basic rate and higher rate taxpayers respectively, because they won’t be paying income tax on the money they set aside.

“In other words, if you save £1 into a pension, you’re only actually sacrificing 60-80p of your take-home pay.”

TAX ADVANTAGED INCOME

Mr Browne explained once in retirement, the accumulated pension savings can be converted into an income.

This can be achieved in a variety of different ways, he said.

Mr Browne added: “…Like an annuity providing a guaranteed fixed income for the rest of your life, or by withdrawing money through flexi-access drawdown which gives you discretion over how and when to draw income.

“The first 25 percent of retirement income is exempt from income tax and is often referred to as ‘tax free cash’.

“It is the portion of your pension that you can receive entirely without income tax, with the exception of the personal allowance.

“In addition, most people will pay a lower rate of income tax in retirement because of their lower income.

“Almost everyone has a lower income once they reach retirement, reflecting the fact they’re no longer in work and may not have costly items such as mortgages or travel costs.”

STATE PENSION

Almost everyone gets a pension, but it only provides a basic level of income.

Mr Browne claims it also offers relatively little flexibility.

He said: “It only starts to pay once individuals hit their late 60s.

“And that age is set to increase because the government keep it under review.

“Some people think today’s younger people might be in their 70s before they get a state pension.

“It also isn’t possible to take a lump sum from the state pension. It only provides a fixed income every year.

“While this is hugely valuable, it means there isn’t the flexibility to make a single larger withdrawal in certain years or flex your level of income to suit your needs.”

MARGINAL GAINS

The increase to minimum contributions are only small, meaning many will not notice the difference in their pay packet.

However, it will make all the difference when it comes to retirement.

Mr Browne said: “In exchange for giving up an extra two percent of salary, most employees will be rewarded with the employer contributing half that amount as well, on top of what they already pay in.

“In total, the contribution rates will be a minimum of three percent from the employer and five percent from employees, although many companies will offer more generous rates.

“Likewise, a lot of individuals will already choose to contribute more to boost their pension pot.

“Those with salaries of around £45,000-£60,000 will be hit hardest when auto-enrolment contribution increases come in, but the two percent increase turns into a 66 percent larger pension pot.”



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