Do I Have to Join a Pension Scheme?
Increasingly we are seeing more and more young people enquire about pensions. It would seem the younger generation is much more concerned about future finances, whether this be as a result of Brexit conversations or the threat of recession.
A pension helps to fund your retirement. Although everybody gets a pension from the state, this unfortunately doesn’t go very far and UK workers are encouraged to help build on this. Saving for your future in a pension scheme is a solid way to put aside money that cannot be touched until later life.
Your pension obligations
If you’re self-employed, you are not obliged to join a pension scheme, however if you wish to do so, there are some pretty good providers of private pensions out there.
If you are employed under PAYE then you will automatically be enrolled in an occupational pension scheme. Employers are now required by law to have an auto-enrolment pension scheme. All workers must be enrolled and both the worker and the employer are obliged to make a contribution.
The overall contribution required from employer and employee is, as of this year 8%. This is made up of a minimum of 3% from your employer and 5% from the employee. This applies to earnings over £6,136, to the limit of £50,000.
If your employer chooses to pay less than 3% then you as the employee will need to make up the difference to meet the 8% joint contribution amount.
What about tax on pensions?
Employees making pension contributions are eligible for tax relief on payments – that’s .20p for every .80p you pay in. So your contribution is less than you might think.
Growth on your pension savings is tax free however they are taxable when you come to draw them. If you choose to draw a lump sum, you will be able to take part of your pension as a tax free amount.
What about the state pension?
If you were born between 6th October 1954 and 6th April 1960, you can access your state pension at 66 years of age. This age will increase over the coming years as changes to the state pension age are enforced.
Anyone who reaches state pension age on or after 6th April will be entitled to the new state pension. The new state mention is available to both employed and self-employed workers who have at least 35 years of National Insurance Contributions.
Currently the new state pension amount is £168.60 per week.
When can I draw my occupational or private pension?
You can draw your occupational or private pension as early as 55-years of age – good news for people who want to top up their salary or take early retirement. It’s also possible to draw a lump sum. To release funds from an occupational pension, you will need consent from your employer and the pension scheme trustees. For private pensions, no consent is needed.
So do you have to join a pension scheme? The obligation depends on your working circumstances, however we would strongly advice setting up a private pension if you do not have an occupational pension, in addition to the state pension. This will make life much more comfortable when you come to retire.