- It could be tempting to stop paying into your workplace pension, especially when you have to make difficult choices about your finances. But there are a number of important benefits you could lose if you choose to opt out of your workplace pension scheme.
So why should you stay in your workplace pension?
1. Your employer pays in too
- Pensions are a form of deferred pay, especially when it comes to the money your employer pays in. Not only does your employer pay you a wage, they put money into a pension so you have income in retirement.
- The amount your employer will put in varies. There’s a minimum amount they’re required to contribute by law, but many employers go further than this, particularly if you also increase your contribution. If you opt out of the workplace pension, it’s like turning down free money, because your employer will stop paying in as well.
2. You get help from the government through tax relief
- When you earn money you pay income tax, usually at a standard rate of 20%, but at 40% or 45% if you're a higher earner. When you choose to put some of that money into a pension scheme, you no longer have to pay tax on it.
- For most high earners, the advantages could be even greater. For someone paying tax at 40%, it only costs them 60p, because the government contributes the other 40p.
- People with a taxable income of more than £150,000 should seek further independent financial advice about their tax position when it comes to their workplace pension.
3. You get access to a tax-free lump sum
- Later in life, when you’re thinking about taking money out of your pension, you can usually take a quarter of the whole pot tax free. This means that you pay no tax on your contributions, get tax breaks on the growth of the money inside your pension, and then can take out a good chunk with no tax at the end.
4. Your pension scheme may pay out to your loved ones if you die
- The main aim of a pension scheme is to provide you with something to live on when you’re retired. But many pension schemes will have additional benefits if you were to die or become seriously ill.
- Most pension schemes offer some form of payout if you were to die. This can sometimes be a multiple of your annual salary, and can be very valuable to loved ones you leave behind.
5. You’ll have more choice over when to retire
- Ultimately, the purpose of pensions is to replace your wage when you’re ready to stop work. The more you have in pension rights, the more choice you have about when you can afford to retire. There would be nothing worse than deciding you’re ready to stop work but realising you have to carry on possibly for years because you haven’t built up enough to live on.
