Join pension or take the cash?

[Deleted User]

My son in law, aged 30, has been offered to either join the company pension or the equivalent sum of money which he would then have to put in to a pension for himself.

The benefits of joining the company scheme would be simplicity but is there anything else he should consider?

Thank you

PensionTech

Does the company offer salary sacrifice? If so, he can save on National Insurance by using the company scheme.

Company schemes have to cap their charges to a maximum of 0.75% per annum (or equivalent), which he may find hard to match with a personal pension.

If he doesn't know an awful lot about investing and is happy to go with a default fund with an appropriate risk profile, then the company pension may be simpler. However, if he wants to a lot of control over his investments and a wider range of funds available, a personal pension may offer more flexibility - but this is not necessary for many people.

If he pays higher rate tax, then he will only be given basic rate relief on any contribution to a personal pension - he will have to claim back the additional tax relief on his tax return.

Conversely, if he earns close to or below the Personal Allowance, he may receive more tax relief through a personal pension than a company one, depending on the method of tax relief used by the company pension. At age 30 though, I assume this is unlikely.

He may be tempted to spend the money rather than putting it into a pension if he accepts it in his paycheque. Indeed, if he contributes through the employer scheme, he will almost certainly be putting some of his own money in as well as the employer's money, so he shouldn't make the mistake of putting only the employer's extra money into a personal pension and believing that to be equivalent. On the other hand, if he does save into a personal pension, he may be encouraged to save more than the minimum contributions required by the employer scheme. If the employer scheme doesn't allow him to save more than the minimum (which is possible but not all that likely), then he may save more effectively in a personal pension.

If the employer offers any sort of "matching" - i.e. if they offer to pay in more if the employee pays more than the minimum - then it is worth using the employer scheme and paying as much as possible to secure the maximum amount of free cash from the employer.

I think that's everything...

greenglide

This is auto-enrollment? If so the offering of cash inducements not to join breaks the rules.

Join the scheme with the maximum contributions to get the maximum employers contributions.

If they are flexible link this ask for contributions by salary sacrifice so get gets even more.

PensionTech

This is auto-enrollment? If so the offering of cash inducements not to join breaks the rules.

It entirely depends on how and why it's done. My own contract specifies that 10% of what I get paid is not salary at all, but instead in respect of a pension contribution. The company is too small to have had a pension scheme before now, and won't go through AE until next year. They are going to divert the minimum from the 10% into the AE scheme (more if we ask them to, of course), but if someone opts out, they will continue to receive the full 10% within their salary. This is a type of flexible benefits package. TPR are quite happy with it unless they consider that the purpose of offering it as cash is to induce people to opt out of the scheme. I have also worked with clients with similar setups; one provided 15% employer pension contribution, but didn't provide a scheme, so employees would set up a personal pension and the client would pay directly into it. Upon staging, they are cutting contributions to the personal pension by the AE minimum and putting that into the AE scheme instead; if someone opts out, they get the full amount put into their personal pension again. If they don't have a pension scheme, they don't get the money at all - which is the main thing that differentiates it from my own setup - but again it's all above board.