Free money? Yes please

From 2018 all employers will need to contribute at least 3 per cent of your salary to your pension. Don’t opt out, this is essentially free money for your future.

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It is a very old situation where on reaching age 60 or 65 a staff member was presented with a gold watch. This always seemed to be ‘rubbing it in a bit’: “Here is something that you can look at now watching time passing because you have nothing else to do after 40 years working.”

But then, when the old-age pension was invented in 1947 the average life expectancy in retirement was somewhat limited. Since then medical science has ensured that we all have an excellent chance of living much longer in retirement and enabled us to have a much more active lifestyle.

Perhaps it was just me, but in the 1950s reaching age 75 meant “old” and the expectation was that few people reached their 90s. Now 75 is still an age to go on globe-trotting trips and “old”, in general, does not arrive until 85 plus and there are many people in their 90s still enjoying a quality of life not dreamt of even 20 years ago.

The government has had to face the fact that people are, now, living much longer than was the case and the state benefits for pensioners cannot be maintained. Therefore pension age has been progressively increased and the expectation is that this will continue into the future. This has also meant that although employers can ‘expect’ staff to retire at a given age, there is no effective age at which staff ‘will’ retire if they are still capable of doing their job.

This, in turn may be helpful for the individual. As you will have seen and heard in the media over the last fifteen years or so, the return from private pensions has been falling as a result of greater life expectancy and the reduction in bank base rates which has had a knock-on effect of reducing the gilt market on which pension annuity rates are based. Therefore the ability to work and maintain ‘earnings’ for longer may provide the opportunity to continue to fund pension until it can produce an income closer to requirements.

Putting all of this together explains why the government has decided that there will be private pensions for all for the future and why the contribution level has been set at a total minimum of 8 per cent with effect from 2018 with at least 3 per cent being paid by the employer.

This does not mean that you ‘have to’ contribute as there is an opportunity to ‘opt out’ but this must be done within three months of being ‘automatically enrolled’ and the exercise will have to be repeated every three years. The ‘opt out’ facility is only likely to be really appropriate for people very close to taking benefits or where the potential pension pot will be very small. Even then to ‘opt out’ means giving up the opportunity for your employer to contribute to a pension for you.

The other point worth making is that you do not have to stop work to take benefits. Nobody knows the length that they have to live so there is a good argument for ‘taking benefits’ when that is worthwhile as a pension in the hand is worth two in the ‘maybe’.

In summary – it is probably sensible to accept the pension contribution from your employer, consider when to ‘take benefits’ from both state and private pensions and discuss your individual situation with an independent financial adviser who can help you through the rules and figures relevant to your individual circumstances.

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About the author

Chris Howell bought Seaway Insurance as a very small insurance brokerage back in 1987. Prior to that he had worked within the industry for 23 years. Specialising in investment and pensions.

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