If you’re approaching or in your 60s, it might seem a little late to be contributing to a pension to boost your income for when you retire. So, it’s perhaps no surprise that new research has revealed that pension opt-out rates are higher for over 60s than for any other age group.
But should you stop paying into a pension when you reach your 60s? With many tax benefits, experts say that you should think twice before ending your contributions.
Over 60s losing out to the tune of more than £1.75 billion
According to a study by Royal London, over 60s are throwing away up to £1.75 billion in pension savings by opting out of their workplace pensions.
Analysis of the insurer’s auto-enrolment book shows that, while opt out rates remain below 10% across all other age groups, they rise significantly for the over 60s. In this age group, almost one in four (23%) chose to opt out – a figure that is in line with other auto-enrolment providers such as NEST.
Royal London looked at the impact that opting out of a pension in their 60s would have on an individual’s retirement savings.
If someone aged 60 on the average wage was auto-enrolled into a pension scheme and paid the minimum of 8% contributions, they would have amassed a retirement pot of £13,980 by the time they reach the age of 65.
However, it’s worth bearing in mind that pension contributions are made up of:
- An employee contribution
- An employer contribution
- Tax relief from the government
Taking this into account, using the example above scheme members would only need to contribute just over £6,600 of their own money to achieve the retirement pot of £13,980.
So, by opting out of their pension scheme, each member could be missing out on up to £7,000.
According to Labour Force Survey data, there are approximately 1.1 million people aged 60 or over who are in full-time employment. This means more than 250,000 people could be affected by opting out of their pension, and if each of these stands to lose up to £7,000, then collectively this group could be missing out on as much as £1.75 billion in retirement savings.
There are two main reasons why over 60s may choose to opt out of their pension scheme:
- They feel they have already saved enough into a pension
- They believe that they are too close to retirement to make a real difference to their retirement income.
However, by opting out they miss out on employer contributions, tax relief and investment growth which can significantly improve their retirement income.
Helen Morrissey, pension specialist at Royal London, said: “It is understandable that someone at the age of 60 might think it is too late to save enough to make a difference to their retirement income, but they are wrong.
“Our figures show older workers are throwing away thousands of pounds on retirement income by opting out of their scheme. We would urge anyone thinking of opting out of their auto-enrolment scheme to think twice before doing so.”
Additional tax benefits to using a pension for saving
Aside from the tax relief on the money being invested in a pension, there are other tax benefits to using a pension for your savings.
While you are earning, any tax relief payable on the contributions you make into your pension is made at your highest tax rate. So, if you’re a higher-rate or additional-rate taxpayer, you’ll benefit from tax relief at 40% or 45%.
In retirement, you will then often drop into a lower Income Tax band. So, while you enjoy tax relief in your contributions at the higher rate, you could end up paying tax on the income from your pension at the basic rate.
Additionally, when you take your pension you are able to withdraw some of your savings as a tax-free lump sum. Considering that you benefit from tax relief when you put money into a pension and can then take some of the money out tax-free, it makes a pension a more tax-efficient way to save money than some of the other alternatives.
One thing to be aware of if you want to carry on paying into your pension if you’ve accessed it
We have seen that there can be a range of reasons why you might want to consider contributing to your pension, even if you’re over the age of 60.
However, there is one factor to bear in mind, and that’s the Money Purchase Annual Allowance.
Ordinarily, you can pay up to 100% of your taxable salary or £40,000 (whichever is lower) into a pension and benefit from tax relief.
If you have already started to draw from a Defined Contribution pension scheme, the amount you can pay into a pension and still benefit from tax relief reduces. This is known as the Money Purchase Annual Allowance (MPAA) and stands at £4,000 (2019/20 tax year).
You can trigger the MPAA if:
- You take lump sums from your pension pot (including taking the entire pot as a lump sum)
- You move to Flexi-Access Drawdown and start to draw income
- You buy a flexible (or investment-linked) annuity where your income could go down.
You generally won’t trigger the MPAA if:
- You take a tax-free cash lump sum and buy a lifetime annuity that provides a guaranteed income for life (either level or increasing)
- You take a tax-free cash lump sum and move to Flexi-access Drawdown but don’t take any income
- You cash in a small pension pot worth less than £10,000.
If you trigger the MPAA it means you will only be able to pay £4,000 into your pension each year and still benefit from tax relief.
Get in touch
If you are 60 years old, you will have six years left to work if you remain employed until State Pension age.
This means that six years’ worth of contributions from both you and your employer, topped up by the government and carefully invested, could turn into a useful pot of money to boost your retirement income.
If you would like to review your pension arrangements, please get in touch. Email email@example.com or call (0161) 8080200.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.