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Company Pension Non-Joiners and Opt-Outs


Company Pension Non-Joiners and Opt-Outs

Especially if the scheme is earnings-related.

Background of pension scheme opt outs and non-joiners

Until the last decade most employee pension schemes within medium to large size firms (including public sector employees) provided pension and tax-free cash benefits based on an individual’s final salary. A typical scheme might provide a retirement pension of 1/60th of the retiring employee’s final salary for each year of service.

Example

John has worked 30 years for ABC Ltd as a member of the firm’s 1/60th final salary pension scheme. His final pensionable salary is £40,000. His pension is, therefore, 30/60ths of £40,000 = £20,000 per annum. His scheme invites him to exchange part of his pension for a tax-free lump sum.

Why have many employers scrapped their final salary pension schemes?

Cost. Without going into too much detail, various developments – legislative, interest rates and investment-linked – have increased the cost of running final salary pension schemes providing generous benefits.
Even before these developments, the cost of providing benefits were typically around 20% of the employee’s annual earnings.

But didn’t the employees contribute to their scheme?

Yes, but not by much, if anything at all. The maximum amounts payable by employees in certain schemes is 6% of earnings. Even this level of contribution is far outweighed by the employer’s contributions.

So why do many employees opt out of pension schemes, or elect not to join from the outset?

It’s somewhat of a mystery. People who choose a pension scheme opt out forego valuable benefits free of charge or for a nominal cost, often in favour of making contributions to a personal pension which does not benefit from employer contributions.

If you have ever been advised to opt out of a pension or to not join a final salary pension scheme contact us now for a free initial assessment.