Auto-enrolment into Workplace pensions began today, and whilst only the employees of the largest companies will be joined on Monday, by 2015 virtually all employees will be ‘opted-in’.

There’s few times in life that you will be offered money for free, and whilst a pension can currently be taken no earlier than age 55, it will be in the interests of most employees to join the scheme. Initially, any eligible employees will have a contribution deduction of 0.8% of their post-tax earnings between £5,564 and £42,475. The government will grant an additional 20% additional tax relief, taking the total to 1% of these earnings; your employer will match these savings. So when might an effective 250% increase in your savings rate not be a good thing?

The danger of inertia

Ignoring those who cannot afford the contributions, or who would be better advised to reduce household debt, there is a significant profile of individual who will need to opt-out. This specific case is detailed below:

In 2006 the concept of a Lifetime Allowance was introduced, this lead to the highest permissible pension savings without a tax charge being set at £1.5m. Individuals who agreed not to contribute to a pension ever again may have been granted ‘Enhanced Protection’. From a technical perspective the level of benefits these individuals can accrue without a recovery tax charge is unlimited.

Similarly those with pension benefits at or near a total value of £1.5m may have elected for Fixed Protection, which ensured these individuals would retain a ‘Lifetime Allowance’  of £1.8m.

The implications

The effect of joining a workplace pension, could be devastating on these individuals (typically a 55% tax on any excess above the current lifetime allowance of £1.5m). This means not only is it important to obtain appropriate advice; advice will need to be delivered urgently, as only one month is available from joining the scheme and opting out. If this deadline is met then an individual will be treated in law as never having joined the scheme. In three years time they will be rejoined, and the same issue will arise.

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