Every month, Peter Watters, ACA, shares some useful financial tips especially for Business in Hastings readers. This month, he looks at Company Pension Schemes with Mcphersons Financial Solutions expert, Daron Beacroft.
Workers who believe they are too old to save in a company pension are missing out on the chance to triple their money. Automatic enrolment really is for you!
Thousands of workers in their 50s and 60s have rejected the opportunity to join new company pension schemes because they think they are so close to retirement that the savings won’t make any difference.
However, new pension reforms mean they could effectively get as much as a 258 per cent boost to their contributions in just a few years and take out all their money tax-free.
Two years ago, firms started enrolling all workers automatically into a pension scheme. This began with the biggest firms; by 2017, all employers will have to do this.
Employees don’t have to do anything to join, they can opt out.
Once enrolled by your employer, your contributions are deducted from your payslip. Your employer contributes to your pension fund, too, and there is added tax relief from the Government.
Some people have opted out because they believed the amount they could save would be so small it would make no difference to their retirement income, but two things have changed since people made the decision to opt out: the amount of income you can earn before paying tax; and new pension rules, which allow you to take all your money in cash.
It means, in effect, that retiring workers could draw all their money out of the company pension scheme and not pay a penny of tax.
So how does it work?
A worker enrolled in an automatic company pension saves 0.8 per cent of their salary, 80p for every £100 of earnings. Their employer adds another £1. This gives a total of £1.80 on the employees’ contributions. Paying into a pension, you get back the tax you had paid on those earnings.
So, if you pay in 80p, the Government adds 20p to return the 20 per cent income, on a basic rate taxpayer. So your £1.80 is now £2.
Also, because your money is invested, it grows with the stock market. Assuming a rate of 5 per cent a year and earning £24,000 today, an increase in contributions in 2018, a small pay rise every year and 5 per cent annual growth, at these rates, a 55-year-old could build up a sum of £14,134 by the age of 65.
Of this, £5,479 would be their own money, £4,315 from their employer, £1,370 tax relief and £2,970 investment growth.
Amounting to a rather nice 258 per cent increase on the amount they put in.
A 60-year-old could save £5,383. That’s £2,556 from their own money, £2,181 from their employer, £639 tax relief and £631 investment growth, a 210 per cent boost.
When you draw money from a pension, you can take 25 per cent tax-free, but the rest is taxed at your normal rate. But everyone gets £10,500 a year before paying tax from April 2015.
The current state pension of £113.10 is worth about £5,888 a year, while the new flat-rate state pension will be worth about £155 a week when it is introduced in 2016, which makes that £8,060 a year. Meaning that even with the new state pension, you can have £2,440 a year extra income tax free.
Every three years, workers who initially opted out of automatic pensions are put back into the scheme.
Need more help?
This feature aims to give some informal hints and tips. Mcphersons are offering businesses free advice so get in touch now to arrange your meeting. Simply email Peter Watters email@example.com or call our Head Office on 01424 730000 for a free consultation at mcphersons’ London, Bexhill or Hastings offices. www.mcphersons.co.uk