Opt out of workplace pension and invest privately?

rmoore_2

I'm currently enrolled in a workplace defined contribution pension. It's performing fine and I'm still around 20-25 years away from retirement. However, my employer gives me the option to opt out of the workplace scheme, take any contributions (including theirs) as cash and invest privately. I'm wondering what the pros and cons of doing this are?

I guess the obvious one is of convenience. My employer deals with tax deductions at source, whereas if I were to take the money it would be taxed and I'd need to apply for the tax relief myself (presumably a private pension wouldn't do this for me?). There might also be an argument that the workplace pension scheme has lower costs through economies of scale.

What are posters' views of the pros/cons of sticking with the employer's pension, as opposed to setting up a personal one?

manzanilla

My employer deals with tax deductions at source, whereas if I were to take the money it would be taxed and I'd need to apply for the tax relief myself (presumably a private pension wouldn't do this for me?)

If you set up a SIPP (Self Invested Personal Pension), then the SIPP will reclaim basic rate tax on contributions paid in. You reclaim higher rate tax through your self assessment tax form.

There might also be an argument that the workplace pension scheme has lower costs through economies of scale.

Well in theory In practice a lot of employer schemes use funds that charge a lot, so the costs of running a SIPP which invests in 'cheap' tracker funds or ETFs are lower.

One big advantage of of having your own pension is that you can put other pension monies into it, eg from a previous employer. You are also likely to have a wider choice of what to invest in in a SIPP.

I think you should look at what your pension is currently invested in and what the charges are. Then look at what it would cost to have a SIPP through say SIPPdeal or Hargreaves Lansdown.

dunstonh

However, my employer gives me the option to opt out of the workplace scheme, take any contributions (including theirs) as cash and invest privately. I'm wondering what the pros and cons of doing this are?

If the workplace scheme uses salary sacrifice then you pay reduced NI.

whereas if I were to take the money it would be taxed and I'd need to apply for the tax relief myself (presumably a private pension wouldn't do this for me?).

If you were a basic rate taxpayer, yes. However, if you are higher rate you would need to contact HMRC.

There might also be an argument that the workplace pension scheme has lower costs through economies of scale.

The workplace scheme may or may not be a cheap option. Some are very cheap. Others are priced at full retail. Whilst economies of scale may apply to schemes with thousands of members, sometimes hundreds, it doesnt work well in the sub 100 range or with companies with high turnover of staff.

Be wary of SIPPs promoting themselves as low cost. Frequently, these are more expensive than personal pensions that do not market themselves the same way. Inexperienced investors can fund themselves thinking they are in a low cost SIPP when a personal pension would be better (we can largely eliminate stakeholder pension as that is long in the tooth now and more of a niche product now)

What are posters' views of the pros/cons of sticking with the employer's pension, as opposed to setting up a personal one?

Are you sufficiently knowledgeable and active enough on investments to need and want your own one?

GhIFA

Quite possible tha taking the SIPP route will cause you additional admin yourself when your employer has to implement auto-enrolment- they will still be required to auto-enrol you in whatever their preferred a-e scheme is, and you will then need to opt out.

dunstonh

There is also the issue that you would be classed as an opt out. Some providers will not set up pensions for people opted out or require an IFA to sign off on it. Opt out rules were changed late last year to include auto enrollment.

quotememiserable

rmoore wrote: »

It's performing fine and I'm still around 20-25 years away from retirement. However, my employer gives me the option to opt out of the workplace scheme, take any contributions (including theirs) as cash and invest privately.

I'd make 2 points.
Your employer will let you take out the money including their contributions, but are you sure they continue to make contributions?
What is the advantage of moving? This boils down to what investment choices there are in the employers offering and what you'd like to do that's not there.

grey_gym_sock

dunstonh wrote: »

If the workplace scheme uses salary sacrifice then you pay reduced NI.

and you wouldn't get any of that NI reduction with a private pension. though if it's not a salary sacrifice scheme, it make no difference.

but also, there is no NI due on the current employer pension contributions. if they pay that money to you instead, there will be both employer and employee NI due on it, for which you won't be able to get any reduction.

(i'm guessing your employer will reduce the amount they pay you to cover their liability for employer NI. if they don't do that, it will cost them more.)