Making the right choices now will pay in retirement

Pensions: Schemes are a tax-efficient way to save

The UK population can expect to live longer than ever before and the number of retired people is rising. To encourage more employees to save for their future, the UK Government has introduced new rules for pensions.

Employers will have to automatically enrol certain employees into a qualifying pension scheme and make contributions for them.

Not all employees will be automatically enrolled. It depends on your age, earnings and whether or not you work in the UK. Workers aged between 22 and state pension age and earning more than £9,440 a year – and not already a member of a qualifying scheme – will be automatically enrolled without being asked by their employer.

If you do not want to stay in the scheme, you can choose to opt out within one month of being enrolled but you will lose out on your employer’s contributions, as well as tax relief from the government.

If you are not among those being automatically enrolled, you can usually opt in to the scheme.

Workers earning £5,668 or less can join a scheme but may not receive employer contributions. Minimum total contributions start at 2% of qualifying earnings – the band of earnings between £5,666 and £41,450 – whichwill rise to 5% in 2017 and 8% from October 2018.

Your employer must initially pay at least 1% of the total, rising to 2% in 2017 and 3% from October 2018.

You will have to makeup any shortfall between your employer’s payments and the minimum contribution level but your contributions will be increased by income tax relief.

For every £80 net you contribute, the government would add £20, so for basic rate taxpayers the total contribution would be £100. Higher rate taxpayers could claim an extra £20 of tax relief through their tax returns.

If your scheme uses a salary exchange facility, you will also save National Insurance contributions on the amount exchanged. The money invested in your pension fund grows virtually tax-free, giving you a larger fund at retirement.

From the age of 55 you can take up to 25% of your fund tax-free, with the rest being available to provide an income. There are other options but the right choice for you will depend on your future circumstances.

It is not necessary to retire before taking benefits from your fund and you can phase in retirement. Saving into a pension is a tax-efficient method of providing for your retirement which can give you the lifestyle you want in later life. It is, therefore, worth considering paying more than the minimum contributions into your pension.

In some cases, your employer may match your contributions up to a certain amount.

If you are unsure about how you are affected by auto-enrolment, you should seek help from your employer’s scheme adviser or another suitably qualified financial adviser.

For more information contact Alister Link, Financial Adviser specialising in Corporate Benefits, of AAB Wealth Ltd.