An article on Wednesday in the Daily Mail highlighted a potential jackpot for thousands of workers in their 50s and 60s who had previously believed joining a new company pension scheme wouldn’t be beneficial.
For many older employees the limited number of working years before they retired was often seen as a deterrent to them investing in a company pension scheme due to the limited returns they would receive particularly when you then factored in the lack of flexibility around how the money could be taken and the tax status of the income earned.
This has been evident when you look at the take up rates for auto-enrolment pensions that came into force 2 years ago which have been much lower for older workers.canada goose jakker 1 in 5 workers in their 50’s who have been eligible to date, have opted out, reducing to 1 in 3 for those in their 60s which is considerably lower when compared to young workers where only 1 in 25 have decided not to partake.
When asked the reason for opting out most older workers cited their belief that the amount they could save would be so trivial that it would make no difference to their retirement income.
However, changes to not only the amount that can be earned before paying tax but also the recent pension legislation changes increasing the flexibility around pensions in general means that this is no longer the case.
The article used an example of a 55 year old earning £24k who could potentially build up a fund of £14,134 in just 10 years a 258% increase on their own contribution of just £5,479 during the period.
They could then take 25% as a tax free cash sum (£3533) immediately and draw an additional £2,440pa tax free on top of the state pension each year. If they structured the drawings correctly over the next few years they could take the full amount from their company scheme without paying any tax.
The full article and details of the calculations used for the above example can be located here.
So what does this mean for Auto-Enrolment Pensions?
One obvious side effect of this is that the interest in auto-enrolment pensions by the over 50’s is likely to increase once the implications of these changes filter through.
This will have an impact not only on those businesses that have yet to hit their staging date with higher take up rates meaning higher cost burden on the employer than potentially envisaged but also those that have already schemes in place.
Under auto-enrolment every employee has to be automatically re-enrolled every 3 years so many of those over 50s that have already opted out and likely to opt in next time round increasing not only the financial but also administrative burden on employers.
Related articles and more information
To find out more about auto enrolment pensions at what it means for your businesses read the following related articles and blog posts:
14th August 2014 @ 3pm – Managing Auto Enrolment with QTAC software
28th August 2014 @ 3pm – Auto Enrolment for Accountants & Payroll Bureaux
Alternatively give the team at Qtac Payroll a call to see how you can prepare for Auto-Enrolment Pensions on 0117 935 3500.
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