Can I Stop Pension Costs Coming Out Of My Pay?
- BetterAskAdam.com
- Jan 20, 2024
- 3 min read
So let's not mess around - the quick answer to this is YES, even though it may not be in your best interests to do so.
I was asked this question by a young woman in her 20s who was on a low salary and was surprised to see a pension deduction being made on her wage slip - and would rather have the money now than in many decades time.
So here is the longer answer (much more than the YES I gave above and reasons why it might not be in your long-term interest)
Since October 2012, employers have had to enrol their staff into workplace pension schemes as part of a government initiative to get people to save more for retirement.
It is now compulsory for employers to automatically enrol their eligible workers into a pension scheme. The employer must also pay money into the scheme.
Currently the minimum pension contribution is 8% of qualifying earnings. Your employer needs to pay at least 3%, with you contributing the rest, which is 5%. If your employer pays more than the required minimum 3%, then you don't have to pay as much to b ring it to the 8% level. Both you and your employer can make more than you need to, if you so wish.
Because you have to actively opt-out of having a workplace pension and most people tend to go with the flow - there has been huge growth in the amount people save for their retirement.
2021: £114.6 billion saved into pensions
2012: £81.7 billion saved into pensions
Between 2012 and 2021there was a real terms increase of £32.9 billion compared to 2012, when Automatic Enrolment was introduced. In that respect, it is seen as a huge success.
The proportion of women saving into a workplace pension, jumped by about 50% since 2012. And young people too have benefitted, aged 22 to 29, saving into a workplace pension more than doubling in the same time period. [1]
I Can Opt Out, But Should I?
Well the general view is that saving for the long-term will give you many more options and a better chance of living more comfortably after you retire. It also locks away the money, so you aren't tempted to spend it on a summer holiday. The magic if compounding also helps increase the returns you get, especially if you start young.
But if you are already finding it hard to get to the end of the week without going into debt, I can understand why you want more cash any for hand now, rather than in a few decades time. But it is a big step and not one to be taken lightly.
To opt out of your scheme you will need to complete an “opt out” form from your pension provider. Depending on your provider, you might be able to opt out online.
If you opt out within one month of joining the scheme, you’ll also get your contribution back, [2]
More Changes Coming
The Automatic Enrolment bill has will extend pensions automatic enrolment to younger workers.
It will reduce the minimum age from 22 to 18
It will removing the lower earnings limit. This will mean every pound earned up to £50,270 will be considered as qualifying earnings and be eligible for tax relief and employer contributions
However it is not clear when the rule changes will take place.
Stakeholder Pensions
Often you may be enrolled in a Stakeholder Pension. However employers no longer have to choose this particular type of scheme and can choose another.[2b]
So What Is A Stakeholder Pension?
Stakeholder pensions can be very similar to standard personal pensions, though there are a few key differences:
A stakeholder pension can only charge up to 1.5% of pot size for the first 10 years, and 1% after that.
A stakeholder pension should allow very small regular contributions – as little as £20 a month.
A stakeholder pension might offer you less choice about where the money you have saved, is invested.
They offer free transfers of money between pensions, flexible contributions, and a default investment fund.
Flexible contributions - you must be able to stop and start payments when you want and switch providers free of charge [2/3]
Like all pensions, the big advantage is that you get your tax back. The government will give you tax relief on your contributions, up to your annual allowance limit (£60,000 in 2023-24).
Personal contributions paid to a stakeholder pension scheme are made net of basic rate tax (20%). If you pay income tax at the higher rate (40%), you will be able to claim back the tax difference at the end of the tax year through self assessment or by contacting HMRC.
Sources:
