Pension Planning

Pension Planning

Moving on from payment and taxes, VITALITY is looking into pensions...

In the past many workers have missed out on valuable pension benefits because employers didn’t offer them, or they didn’t apply to join an existing company scheme, but a huge pension’s revolution is set to change that. As part of the Pensions Act 2008, it will be compulsory for all employers to provide a workplace pension scheme for their staff and make contributions to boost their staff’s savings for retirement. Rolled out initially to large employers, the law has now been phased in to apply to smaller enterprises.

All employees should be auto enrolled into a workplace pension scheme by February 2018 but statistics show that 31 per cent of employers still don’t know what auto enrolment is, increasing to 79 per cent for smaller businesses with five staff or less. The new law effectively means that all employees automatically enrol their new, eligible employees into a workplace pension scheme when they start work, and make contributions into it for them, putting the onus on the employee to opt out if they don’t want to join. Employees can’t opt out until they’ve been auto enrolled.

SETTING UP AUTO ENROLLMENT

Employers should write to pension eligible staff explaining auto enrolment, their chosen pension scheme, and the staff’s right to opt out. They assess which members of staff need to enrolled depending on their age and salary. Between 22 and state pension age, employees must earn over £10,000 per year, £833 per month, or £192 per week to be eligible. Employer contributions start at 1% then rise. By October 2018, employers will need to contribute a minimum of 3% for each individual employee. Employers control of their own records and periodically review their staff. After setting up auto enrolment for the first time, employers should fill in a Declaration of Compliance and they face a fine if this isn’t completed in time. After setting up a pension scheme, employers have to complete auto enrolment and make a declaration of compliance again every three years.

BUILDING A NEST EGG

As part of the launch of the auto enrolment initiative, the government set up the National Employment Savings Trust (NEST) workplace pension scheme. Targeted at the nine million or so private sector firms with no existing workplace pension scheme, NEST is a low cost, simple to use auto enrolment scheme. NEST is obligated to accept any employer wanting to use it and contributions are the same as other defined contribution auto enrolment schemes. Both employer and employee contribute to the pot which, when an employee retires, can be used to buy an annuity to provide a retirement income.

Although auto enrolment doesn’t affect sole traders, the self-employed can also start their own pension pot with NEST.

There are over 4.5m people self-employed people in the UK but the number of them paying into a pension has halved, perhaps the pension’s revolution will encourage them to look to the future too. Sole traders may not have an employer to make contributions for them but do get the incentive of tax breaks; tax relief on pension contributions currently up to the annual allowance, £40,000 a year. For basic rate tax payers that means for every £100 they pay into a pension scheme, the government contributes £25. Workers on a higher tax rate, can claim a further £25 for every £100 they pay into the scheme up to the annual allowance.

Most self-employed people consult a financial advisor to choose one of a range of personal pension plans offered by their provider. The provider then claims the tax relief at the basic rate on their client’s behalf and adds it to their pension pot.

There are three types of personal pension. Ordinary, offered by most large pension providers, Stakeholder, where the maximum charge is capped at 1.5% and premiums can be stopped and started without penalty, and Self-investor Personal Pensions (SIPPs) which give a wider range of investment options but usually means higher charges.

The earlier a pension scheme is joined, the bigger the return on retirement. For example, a pension started by a 30 year old, with £100 contributions and a £25 government contribution, will see a return of £70,000 upon retirement, based on savings growth at five per cent per year and charges at 0.75 per cent per year. The same pension started by a 40-year-old will garner a return of £46,000, and by a 50-year-old, £25,000.

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