Compulsory pensions – how do I benefit?

Young boy putting coins into a red piggy bank Compulsory pensions


MoneyPlus Features Team

14th October 2015 at 3:43pm

As around half of the employee population in the UK now have a pension, it seems a good time to highlight the reasons why you should carefully consider what to do if given the chance to join.

There are three main reasons for being in a pension:

  1. ‘Free’ money from your employer

  2. Tax breaks from the taxman

  3. Your family benefits should you die

Free money

The extent of the first item depends on what your employer decides to offer. The auto-enrolment rules require the employer to pay in as well, but only if you don’t opt out. So if you stay in the pension, your employer has to pay something in too which is where the free money comes in. If you decide to opt out, you probably won’t get extra pay instead so that benefit is lost.

Tax breaks

The second is around the various tax advantages of having a pension.

When you pay into a pension, you normally get tax breaks on the way in. The tax breaks on making payments in depends on the type of pension scheme your employer offers and how much you earn. The most common structure for new pension schemes now means that for every payment you make, the taxman adds another 25% into the pension as well.

An example will help here. If you pay in £40 per month, another £10 is added by the government, making the total going into the pension £50. And this is before your employer pays in!

This tax benefit is paid even if your earnings mean you don’t pay income tax at all, the standard Personal Allowance (the amount of income you don’t have to pay tax on) currently stands at £10,600. And if you are a higher or additional rate taxpayer, you can get extra tax relief on your payment by contacting your tax office.

Other pension structures work differently – where your payment is collected before income tax is calculated. Your employer will be able to confirm which method applies to their scheme.

And don’t forget 25% of the pot built up is tax-free when you come to take benefits.

Family benefits

The third means that the pension pot is available to your family on death, and it can be totally free of tax!

Here’s how it works for most pension schemes:

  • If you die before age 75, the pension pot built up can be paid out to your loved ones – they can take it either as a lump sum or in the form of income.    Either type of payment will be free of inheritance and income tax.
  • If you die after age 75, the same options are available but income tax will apply to both types of payment.

Who benefits depends on the instruction you give to the pension scheme so if you aren’t sure who benefits on your death, speak to your employer and make sure your instruction is up-to-date.

Weigh up your options

To recap, a pension brings you free money from your employer and the taxman and also makes sure your family benefits too. So think very carefully about whether opting out is the right thing to do – after all it’s you and your family’s financial future that the pension is helping to provide for.

For more information

If you aren’t sure what to do, Money Advice  can offer some helpful information or speak to a financial adviser.

Join the conversation

Join the conversation and follow us on twitter @StandardLifeUK and Facebook and let us know any of your thoughts.  Do you feel that you have benefitted at all from ‘compulsory pensions’ or do you actively avoid entering into one?

The information in this blog or any response to comments should not be regarded as financial advice. A personal pension is an investment and its value can go up or down and may be worth less than you paid in. Laws and tax rules may change in the future. The information here is based on our understanding in October 2015. Your personal circumstances also have an impact on tax treatment.