Opting out can damange your wealth

David Hill INLT 45-099-PSB
David Hill INLT 45-099-PSB

The new pension rules that will enrol all workers earning over £10,000 per annum by 2018, should benefit almost everyone, even those close to retirement.

Research published last week suggests that over 25 per cent of workers in their 60s who are approaching retirement are opting out of the new pension schemes, under the mistaken impression that pensions are not worth their while. The reality, however, is that it will be worthwhile staying in the new schemes for everyone apart from those who already have pension benefits in excess of £1.25 million.

Staying enrolled is beneficial because the employer will have to contribute to your pension every time you get paid. By 2018, the minimum amount that an employer must contribute to employees pensions will increase to three per cent of anything earned between £5,772 and £41,865. On top of this, by way of tax relief, the Government will pay in 25 per cent on top of what an employee contributes to their pension fund.

Under the current rules, someone over the age of 60 can cash in a small pension fund at any time, if the value of your pension funds are less than £30,000. So even if you are one year away from retirement, it is still going to be beneficial to stay enrolled in your workplace pension scheme because of the employer and Government contributions.

From April 6 next year, the proposed new pension rules will allow larger pension pots to be cashed in at any time after age 55, and paid out in one or more lump sums, 25 per cent of which will be tax-free.

This flexibility opens up the opportunity for those who are already retired to contribute up £2,880 into a new pension each year and at the same time receive £720 of tax relief from the Government each time they contribute. This is effectively “free money” and this will be especially attractive for non-taxpaying pensioners, as the pension fund may then be able to be drawn entirely tax-free.

How long these particularly generous pension rules will last, remains to be seen, but the general advice is to take advantage of any tax breaks offered by the Government as and when they are available.

David Hill is a Chartered Financial Planner and Independent Investment Adviser at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814, email david@hillsfinancialplanning.co.uk or see www.hillsfinancialplanning.co.uk