Whenever we are asked “Should I pay into my employer’s pension”, the answer is always an enthusiastic “Yes!”
But clearly that would make for a very short article, so let’s explore that in a bit more detail…
What pension scheme does your company have?
The first thing to say is that all pension schemes are not equal. They can range from legacy final pension schemes (which are few and far between these days) to auto-enrolment which was introduced a few years ago.
The pension schemes from the big brand providers you will recognise, like Aviva, are defined contribution based Schemes. This means that you and your employer will make defined contributions to the pension plan, typically on a percentage basis, whereby the outcome of the pension is not guaranteed. The contributions can be invested in a number of different funds, which are usually overseen by qualified fund managers who are expected to deliver good returns – meaning your pension should perform well, although there are never any guarantees. Unless you or your employer engage with a Financial Adviser to provide help, guidance and advice, this is very much a “do it yourself” pension planning exercise.
The smaller auto enrolment pension providers are usually less well known and a provider that was set up via a “loan” from the Government, NEST, tend to have a narrow range of funds to choose and select from along with poor options when you come to retire and take your benefits. Whilst these smaller providers are still in the market for Employer Group Pension Schemes over time they may become less competitive and the larger insurance companies may offer better terms and options for the employees.
We would recommend you pay into the pension regardless of which type of pension your company has, but do this with your eyes open so you understand what you have.
How much should you pay in?
Minimum contributions are mandated by the Government and change from time to time.
At the time of writing this article, from April 2019 onwards the minimum contribution is 8%. This is made up of three parts – 4% from you, 3% from your employer and 1% in the form of tax relief from the Government. If your employer is putting in more than 3% your contribution can be reduced – if you wish.
Clearly the amount you choose to contribute will be dictated by your salary and your regular expenses. However, if you are able to pay more in than the minimum, we would actively encourage you to do so.
What if I can’t afford anything?
Pension arrangements are now governed under the auto-enrolment pension legislation and if you meet certain criteria in relation to age and salary then you are automatically enrolled into the Scheme. You do have the right to opt out if you wish to do so.
This is flexible, so if you opt out for a period of time, you can always opt back in at any time.
If you have debt issues, then maybe you should prioritise solving those first. However, you should look at your pension as “free money”. In other words, if you receive a pension contribution from your employer it is like having an additional salary.
At this point, it’s also worth saying that the younger you start your pension contributions the better. It means your final pension fund, when you are ready to retire, will be significantly bigger and is likely to afford you a better lifestyle.
What if I leave and start work somewhere else?
Your pension belongs to you, so don’t worry. The pension stays with the provider of the scheme until you are ready to retire. You don’t need to do anything until that point.
You can amalgamate and consolidate pensions, but that’s something for us to discuss another day.
What if the business goes bust?
You have probably read horror stories about large businesses and their pension schemes disappearing.
But, just to reassure you, your pension is held by the pension provider not your employer, so it is protected. In the same way as your pension being safe if you move to another company, this works in the same way. Your pension sits in the fund until you are ready to access it.
Now, it’s safe to say that pensions are a very complicated subject, and this is a bit of a whistle stop tour, but we will be exploring other elements of pensions during the year, to help de-mystify it.
In the meantime, if you would like a review of your current pension arrangements, please contact us on 01344 875 310.