Why over 60s might want to carry on contributing to their pension
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 info@depledgeswm.com or call (0161) 8080200.
Please note
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.
