Can I opt out of my workplace pension?

Yes, you can opt out of your workplace pension. 

When you start a job with a new employer, they will auto-enrol you into a workplace pension provided you meet the criteria. Effectively, there is no opt-in option.

This means that you, the employee, will pay 5% of your salary into your workplace pension, and your employer will pay 3%. These amounts can be increased by you or your employer, depending on the terms of your employment contract. Your employer may offer matched contributions up to a certain percentage, for example if you increase to X%, so will your employer.

If you no longer wish to make payments into your workplace pension, you can opt out at any time.

What happens if I opt out of my workplace pension?

By opting out of your workplace pension, you are stopping your personal contributions and your employer contributions. And there can be pros and cons of doing so, depending on your personal circumstances.

Advantages of opting out of a workplace pension

More cash now

Right now, with the cost-of-living crisis affecting many of us, we’re all trying to find ways of making our money go further. Naturally, it makes sense that by opting out of a workplace pension, we can have more money in our take-home pay each month. And for younger employees, cash in the bank can seem a higher priority than saving for retirement.

Flexibility to opt back in

Opting out of your workplace pension can be temporary. Check with your employer when you can opt in again. Generally, employers should offer you the ability to opt in again every 12 months. But some may offer more flexibility.

Disadvantages of opting out of a workplace pension

You’ll miss out on tax relief

Paying into your workplace pension gives you tax relief at your marginal rate of tax. For example, if you’re a basic rate taxpayer and want to pay £100 into your pension, it only actually costs you £80. This is because you’re refunded the 20% tax you would have otherwise paid. This is also paid into your workplace pension. If you’re a higher rate or additional rate taxpayer, the tax savings are even greater.

And when it comes to taking money out of your pension, 25% can be withdrawn tax free. The bigger your pension, the more tax-free cash you will have.

Your take home pay may not increase by as much as you think

By opting out of your workplace pension, your contributions become subject to income tax and national insurance. So, the net ‘gain’ in your bank account might not be as high as you thought it would be.

At Bippit, we like to think of a workplace pension as an extension of your salary. By making employee contributions and also getting the employer contributions on top, your salary plus pension contributions gives you a higher total wealth overall.

You’ll be giving up free money from your employer

When you opt out of your workplace pension, your employer will also stop making contributions. That’s free money that will no longer go into your pension. Think about that carefully before choosing to opt out.

You may have to save harder later

While saving for retirement seems bottom of the list when you’re young, the fact is the earlier you start the better. Pensions grow over time, so starting as early as possible means your contributions can work at their hardest.

So, if you opt out of your workplace pension, you’re potentially giving yourself more work to do in the future.

It’s hard to play catch up on your pension as retirement gets closer. This might mean you have less control over when you can afford to retire and the sort of lifestyle you could have.

Does opting out cancel my pension?

Anything already paid into your workplace pension will remain there (subject to investment performance) until you can access it at 55 years old (57 from 2028).

Usually, you’re able to transfer your workplace pension to another pension provider.

If you’ve only just joined your workplace pension and choose to opt out within one calendar month, you’re entitled to a refund of contributions already paid. This is known as the opt-out period. Any refunds beyond this period may be possible but will depend on the rules of the specific workplace pension you have.

Even if you opt out of a workplace pension, your employer will automatically enrol you back into their pension after three years, provided you’re still working for them. Your employer will contact you and if you still wish to not pay into it, you can choose to opt out again.

 

How do I opt out of my workplace pension?

Depending on how your workplace pension is arranged, you should be able to do one of the following:

• Complete an opt out form

• Opt out online

• Opt out by phone

If you’re not sure which options are available to you, speak to your pension provider or pension department at work.

Summary

While the focus for many of us is making our cash go further, opting out of a workplace pension should really be considered a last resort.

There are many benefits of paying into a workplace pension that outweigh the benefits of opting out.

You might want to consider reducing your contributions slightly as opposed to completely stopping them.

If you want to receive guidance and support for workplace pensions at your organisation, book a free Financial Wellbeing Lunch & Learn for your workplace.

 

What happens to my workplace pension when I die?

When you die, all or some of your workplace pension could be passed on to your dependants – spouse, civil partner or other family members.

Thinking about death is something we’d rather avoid. But when it comes to a workplace pension, understanding the financial implications based on your circumstances can help when it comes to leaving a legacy for your loved ones.

Let’s look at what happens when you die, depending on the status of your workplace pension.

Types of workplace pension

There are two main types of workplace pension:

Defined contribution workplace pensions – this type of workplace pension allows you to build up a pension pot for retirement based on how much you and/or your employer contribute and how much this grows. There are no guarantees as to how much it will be worth at retirement.

Defined benefit workplace pensions – less common these days, this type of pension pays a guaranteed retirement income based on your salary and the length of time you were a member of your employer’s pension scheme with contributions being made.

 

What happens to a Defined Contribution workplace pension when I die?

If you die with money left in your defined contribution pension, there are several options for passing on your workplace pension to your loved ones (known as beneficiaries).

When no money has been cashed in when you die

If you die before taking any money from your workplace pension, your beneficiaries can usually:

• withdraw all the money at once as a lump sum
• set up a guaranteed income (an annuity) with the proceeds or
• they may also be able to set up a flexible retirement income (pension drawdown).

Check with your workplace pension provider on the specific options available as they may vary from scheme to scheme.

When you’ve already started taking money when you die

If you’ve already cashed in some of your workplace pension when you die, your beneficiaries can usually:

• withdraw any remaining money at once as a lump sum
• set up a guaranteed income (an annuity) with the proceeds or
• they may also be able to set up a flexible retirement income (pension drawdown).

Check with your workplace pension provider on the specific options available as they may vary from scheme to scheme.

When you’ve already set up an annuity with your workplace pension funds

If you’ve purchased an annuity using funds from your workplace pension, the type of annuity will determine if your loved ones are entitled to any of it when you die.

An annuity pays a yearly guaranteed income until you die. If your annuity is a single life annuity, payments would stop and nobody else would be entitled to anything.

If you chose to include a guarantee period – a certain number of years that the annuity would pay out even if you died – then your nominated beneficiary would continue to receive payments until the guarantee period ends.

If you chose a joint-life annuity – with your spouse or civil partner, for example – they would continue to receive a proportion of your annuity income after your death.

What happens to a Defined Benefit workplace pension when I die?

If you die with a defined benefit workplace pension, the payments on death to any beneficiaries will depend on the rules of your pension provider.

The following people may be classed as dependants and therefore entitled to guaranteed annual payments:

• Spouse or civil partner
• Children under 23 and in full-time education
• Children of any age, if they’re mentally or physically handicapped
• Anyone who was financially reliant on you when you died

The amount a dependant can be paid will be based on the rules set by the workplace pension provider. They are specified in percentage terms based on the full value you would have received while alive. For example, if you would have been paid £10,000 a year in retirement and the pension provider specifies 50% dependant’s pension on death, then a dependant would get £5,000 a year.

A dependant may also be able to take a lump sum but is usually only allowed on small amounts.

 

Tax on your workplace pension when you die

The tax implications on your workplace pension depend on the type of pension and how old you are when you die.

When you die before your 75th birthday

Defined contribution pensions

The general rule is that if you die before you turn 75, any funds in your workplace pension can be passed to your beneficiaries tax-free.

The payment needs to be made within two years of the pension provider knowing about your death.

Your beneficiary may need to pay tax on the amount of your workplace pension that exceeds your pension lifetime allowance.

Defined benefit pensions

The general rule is that any dependant payments from a defined benefit workplace pension are subject to income tax, however old you are when you die. 

Your dependants may be entitled to a tax-free lump sum payment if you die under 75 while still employed and are entitled to a death in service payment.

When you die after your 75th birthday

Defined contribution pensions

The general rule is that if you die after you turn 75, any funds in your workplace pension passed onto your beneficiaries will be subject to income tax.

Defined benefit pensions

As mentioned above, age is irrelevant as regular dependant payments are subject to income tax at whatever age you die.

Inheritance tax on workplace pensions

Many people wonder if their workplace pension will owe inheritance tax when they die.

One of the big benefits of pensions is that they are generally not subject to inheritance tax.

This is because pensions are considered outside of your estate as they are effectively held in trust and managed by your pension provider.

Inheritance tax might be due if you cashed in your workplace pension and didn’t spend it. So the cash in your bank account would then be considered part of your estate.

Ensuring your workplace pension is given to the right person / people

When your loved ones are coming to terms with your passing, the last thing they want is extra stress dealing with your finances.

When it comes to your workplace pension there are several things you can do to make things go as smoothly as possible:

• Add beneficiaries/dependants to your workplace pension and keep them updated if you need to change them
• Make a Will and specify your workplace pension/other pensions in it
• Set up Lasting Power of Attorneys to manage your finances in the event you can longer do it yourself
• Set up Guardians for any children that may need looking after should you pass away

The pension provider may ultimately still have discretion on who your workplace pension goes to, so having the above in order means there can be no misunderstanding regarding your wishes.

If you want to receive guidance and support for workplace pensions at your organisation, book a free Financial Wellbeing Lunch & Learn for your workplace.

 

Can I have a SIPP and a workplace pension?

Yes, you can have a SIPP (Self Invested Personal Pension) and a workplace pension. You can contribute to both at the same time too.

Deciding if having both is right for you will depend on your personal circumstances.

Ultimately, having more than one pension will mean taking an active approach to managing them. An active approach gives you greater control over your pension investments – the fees you pay, what investments you choose and any changes you make.

Differences between a SIPP and a workplace pension

While a SIPP and a workplace pension are retirement products with tax benefits, there are some key differences.

Workplace pension key features

• Managed by your employer and pension provider

• Auto enrolment rules mean you and your employer must make contributions

• Contributions automated through your employer’s payroll

• Tax relief can be applied via three methods: relief at source, net pay or salary sacrifice.

• Investments usually matched to your age and adjusted automatically over time

• Fees sometimes discounted

• Suitable for investors with little or no experience

 

SIPP key features

• Managed by the SIPP holder (you)

• Contributions can be flexible based on what you can afford

• 20% basic rate tax relief will be automatically granted. Higher rate tax will need to be claimed back from HMRC.

• Greater choice and control over your investments

• Fees often higher than workplace pensions but some low-cost SIPPS available

• Suitable for experienced investors

 

Should I have both a SIPP and a workplace pension?

Having a SIPP and a workplace pension means having a clear retirement investment strategy.

Workplace pension is at the core

By default, your workplace pension will be doing a lot of the hard work for you. 

If you’re not an experienced investor, you might not have any need to make things more complicated or time consuming.

A SIPP can add flexibility

The addition of a SIPP to your retirement investment strategy can be useful for experienced investors. If you like to research investments, have a preferred pension provider or want a greater choice of investments, then a SIPP will give you flexibility.

Combining old workplace pensions

Workplace pensions may come and go, depending how often you change jobs.

Ensuring you keep track of old workplace pensions means having a strategy in place. That could involve having a SIPP.

Option 1

Do nothing. Keep the details of for your old workplace pensions safe, so that you don’t lose track of them. 

Option 2

Transfer your old workplace pensions into your current workplace pension. This keeps everything in one place so that you have less admin to deal with. Dealing with the admin of old pensions – like updating contact details – can be a hassle.

Option 3

Open a SIPP and transfer your old workplace pensions into it. Use the SIPP for future workplace pensions you acquire if you change jobs again.

It’s also possible to make transfers from your current workplace pension to your SIPP.

You might want to do this if your workplace pension has limited investment options. Bear in mind that you must always keep a small amount (some providers will have a minimum amount) in your workplace pension to keep it active for future contributions from your salary.

 

Should I contribute to both a SIPP and workplace pension?

As mentioned, your workplace pension is your default pension and benefits from employer contributions (free money effectively) as well as your own personal contributions.

There’s nothing stopping you from contributing to both. The tax benefits are usually the same.

However, there’s one instance when paying into your workplace pension will save you more in taxes than contributing to a SIPP.

Workplace pension contributions via Salary Sacrifice

When it comes to workplace pension contributions, Salary Sacrifice (sometimes called Salary Exchange) is the most tax-efficient way of adding money to your pension.

The unique feature of Salary Sacrifice is that not only do you get income tax relief on your pension contributions, but you don’t pay National Insurance either. For a basic rate taxpayer, that’s an additional tax saving of 12%

This effectively means your pension contribution costs you less in taxes vs contributions to a SIPP. A SIPP only gives you income tax relief. 

So, if you’re considering making additional contributions to a SIPP and you already have a Salary Sacrifice workplace pension, the best thing to do from a tax point of view is to increase contributions to your workplace pension.

If you’re not sure if your workplace pension uses the salary sacrifice method, check with your employer.

Summary 

Having both a SIPP and a workplace pension could be suitable for you depending on what sort of strategy you want to have for managing your pensions.

The key difference is that you’ll take more active management of a SIPP than a workplace pension.

And if you want to receive guidance and support for workplace pensions at your organisation, book a free Financial Wellbeing Lunch & Learn for your workplace.

 

Can I withdraw my workplace pension?

If you’re over 55, yes, you can withdraw money from your workplace pension.

This legal rule is to ensure our pensions are used for later in life and preferably for retirement. From 2028, the age at which you can withdraw money from your workplace pension will increase to 57.

If you’re under 55 and meet certain criteria, you may be entitled to take your workplace pension early.

Common examples include:

• Being in poor health and unable to work
• Having a terminal illness
• Having a job that naturally comes with early retirement e.g. an athlete

Defined as ‘Early Release Rules’, eligibility may be determined by the pension provider’s specific rules, an interpretation of the law or a combination of both.

If you fail to meet eligibility and still withdraw money, it will be classed as unauthorised, and you will face a penalty charge.

Workplace pension withdrawal options

If you’re 55 or over and want to start taking money from your workplace pension, there are several options available to you.

• Tax-free Cash

You can usually withdraw 25% of the value of your workplace pension without paying tax.

So, if it’s worth £100,000, you could take £25,000 tax free.

Anything over the 25% is subject to income tax, like your salary.

Many people like to take a nice chunk of tax-free cash from their pension early on. Bear in mind, when it’s gone, it’s gone. So proper planning is important to ensure you’re managing your workplace pension withdrawals as efficiently as possible.

• Flexi-access drawdown

As the title suggests, this option allows you to make flexible withdrawals from your pension. So, one year you might take a larger amount compared to the year after, depending on your needs.

Money taken by flexi-access drawdown is taxed at your income tax rate. So, if you’re still working while taking money from your workplace pension, be aware that you could be paying a higher amount of tax than you first thought you would.

The aim of flexi-access drawdown is to eek out bits of your pension as and when you really need them, leaving the rest of it still invested and hopefully growing in value.

This is where getting professional retirement advice can be beneficial to ensuring your workplace pension lasts as long as possible.

• Buying an annuity

An annuity is a form of guaranteed pension income. To get one, you trade in the value of your workplace pension, or a portion of it, for a guaranteed yearly income for the rest of your life.

The amount of guaranteed income you get is based on annuity rates. They’re usually quoted as an amount per £100,000 of pension. So, if you’re given an annuity rate of 5%, that means for every £100,000 of workplace pension you trade in, you’ll get £5,000 guaranteed income for life.

You can add other elements to an annuity such as a guarantee period if you die early, or a spouse’s pension that means your partner would continue to receive some of your annuity income after you’ve passed away.

Annuities are most suitable for people who want the security of knowing they will get a certain amount of money every year. But bear in mind, once you’ve set one up, they can’t be changed. Again, if you’re thinking about buying an annuity with your workplace pension, we recommend getting professional advice.

Withdrawing from your workplace pension and still paying into it

If you’re thinking of withdrawing money from your workplace pension while you’re still employed, there is an important rule that could apply to you.

Money Purchase Annual Allowance (MPAA)

Usually, you can contribute up to £40,000 or the value of your salary (whichever is the lowers) every tax year into your pension and get tax relief on those contributions.

If you start withdrawing money from your workplace pension in certain ways, you’ll be limited to contributions of just £4,000 a year for the rest of your life.

The main withdrawals when you’ll trigger the MPAA are: 

• if you take your entire pension pot as a lump sum or start to take lump sums from your pension pot.
• if you move your workplace pension pot money into flexi-access drawdown and start to take an income
• if you buy an investment-linked or flexible annuity where your income could go down
• if you have a pre-April 2015 capped drawdown plan and start to take payments that exceed the cap.

If you purchase a guaranteed income annuity with tax-free cash, or only take tax-free cash and do not start taking money as flexi-access drawdown, the MPAA is usually not applied.

Triggering the MPAA early on can issues later in retirement if you’ve been unable to build up a big enough pension pot due to restrictions.

 

Pros and cons of withdrawing your workplace pension early

When you’ve been saving for decades, it can be tempting to get your hands on your pension as soon as you’re allowed.

Reduce working hours

You might want to start withdrawing income from your workplace pension so that you can reduce your working hours as you transition into full retirement.

Extra income before you start getting your state pension

For many of us, we won’t be able to get our state pensions until we’re in our late 60s.

Withdrawing from your workplace pension could help with additional income needs before your state pension (a form of guaranteed income) kicks in.

Greater chance of running out of money

The earlier you start taking money from your pension, the longer it must last.

Funds remaining in your workplace pension could benefit from investment growth, potentially giving you more for the future.

Buying an annuity earlier will pay less income

The earlier you buy an annuity with pensions funds, the less you’ll get back in guaranteed income. That’s because there’s more chance of you living longer as you’re younger.

Could be less efficient than using other savings

If you have a savings account or ISA, you may want to consider withdrawing money from those first. You’ll pay no tax on your ISA withdrawals and your savings may not be subject to tax either.

Summary 

You can withdraw your workplace pension from age 55 (57 from 2028). While it’s entirely up to you when and how you do this, bear in mind that your workplace pension, and other pensions, are there to support you throughout your later years and retirement. 

And as we’re all living longer, it’s important to have a withdrawal plan for your workplace pension. Taking impulse withdrawals early on could mean paying more tax or running out of money.

And if you want to receive guidance and support for workplace pensions at your organisation, book a free Financial Wellbeing Lunch & Learn for your workplace.