Pensions: freedoms, workplace pensions and employer contributions

New research from the TUC has found that there has been a surge in the number of people taking pension cash early without taking any advice. These findings have worried many, including the Financial Conduct Authority (FCA), who may step in to stop millions of workers putting their life savings at risk when they access their pension.

Two years ago, the government brought a range of pension freedoms into effect which allowed people to access their pensions from the age of 55 and abolished the requirement to convert your pension savings into an annuity. As a result, accessing your pension early became ‘the new norm’ for people of that age group.

In a recent FCA study, they found that 72% f pension pots accessed since the 2015 freedoms came into effect were held by those under 65 with most opting for lump sums rather than drawing a regular income. 53% of pension pots accessed had been fully withdrawn and transferred into another savings or investment account but concerns have been raised about the tax bills incurred.

When a large amount of money is withdrawn from a pension account, there will be a significantly high rate of tax to pay. According to current figures, the Treasury has raised five times more in tax from pensions than it forecast when the freedoms were brought in.

The report spoke about the large numbers of people withdrawing their pension and how this may affect them; “Several factors motivated consumers to access their savings early, including a perception that ‘everyone is doing it’ and a general climate of mistrust.” However, moving cash “can result in consumer paying too much tax, missing out on investment growth or losing out on other benefits.”

Meanwhile, millions of British workers who work for large companies are missing out on around £650 a year from their employer. Pension offers from some of the UK’s biggest employers have been dubbed ‘buy one get one free’ schemes where employers agree to match additional contributions made above the minimum level required.

So, if a company’s minimum pension contribution was 3% of your salary and they matched it exactly, that is what staff would pay. However, some larger companies allow you to up your contribution, to say 6% of your salary, and they will still match it exactly meaning that you could potentially double the amount of money entering your pension each month.

For every £1 an individual adds to their pension, they receive tax relief on it from the government so the cost to the individual is only 80p from their salary. When an employer matches the contribution exactly, the 80p invested becomes £2 in the pension pot. So these schemes sound beneficial and a no brainer but the uptake is quite low as most people don’t know about them.

Steve Webb, director of policy at Royal London, commented on these findings to say; “Where workers are unaware of this option, or choose not to take it up, they are in effect passing up on ‘buy-one, get-one free’ cash… When individuals are thinking about where to put their money to get the best return, the chance to more than double your money through an employer contribution and tax relief from the government takes a lot of beating.”

With worrying reports that many are missing out on cash for their pension from their employer and those accessing their pension early are moving money without advice, what can and should you do when it comes to your pension:

1. Speak to a pension advisor – Whether you are just about to set up your first pension, you are wanting to swap providers or are thinking about accessing your pension, it is advisable that you obtain advice from an independent pension advisor. They will be able to answer your questions, provide independent advice and help you find the best products on the market.
2. Look into other ways to save or invest – This could be alongside a pension or instead of and there are plenty of other ways to save or invest your money for the future. From the Lifetime ISA and property investment to stocks and typical savings accounts, you could benefit from all of them but always try to get advice from an independent financial adviser before opting for one.
3. Take advantage of the workplace pension – All businesses must now offer a workplace pension to their staff and it is worth taking advantage of as you contribute but so does your employer. They may match your contribution, or put in more or less, so it is worth doing your research and taking advantage of this deal for your future.
4. Only move money if you are going to get a better deal – Of the people that moved money from their pensions, many moved because of a distrust of the pensions sector but were they getting a better deal? This should be a key question that you ask if or when you are looking to take your pensions savings elsewhere.
5. Keep track of all your pensions – Many experts have warned that the issue with the workplace pension is that by the time most of us reach retirement age, we will have a number of pensions at different companies. As people move companies more and more regularly, it is worth trying to keep up with all of them where you can. The pensions dashboard is likely to be launched soon which could help put all your pensions in one place, find out more about this on finance blog, SavvyWoman. If you have lost a pension, you can try to track it down using the Pensions Tracing Service.

As we are not pension experts, we always recommend that you take advice from an independent pension adviser. For more information regarding pensions, visit the Pensions Advisory Service.

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