Workplace pension - opting out

rmc1664

Hi,

Could this be a sensible reason to opt out of the workplace pension?...

You're currently only paying basic rate tax but believe that your career will lead you into the higher rate bracket. When you eventually reach the higher rate, you opt back in with a greater contribution (provided the employer allows it) to "catch up" the amount you missed by opting out, except now you effectively get a 40% tax break instead of 20% on the same contribution?
In my case, I'm about to buy a house so could do with the extra income right now to get it furnished etc. and would also use the money to clear high interest student debts more quickly.

Please let me know if this is a known trick, or if I've missed something important!

Thanks

NoMore

You don't 'catch up', you just put less in to your pension, its a terrible idea.

Browntoa

Pay in to your pension

Your older self Will thank you

rmc1664

My employer allows me to adjust my contribution, so I could choose to add much more once I'm in the 40% tax bracket. So wouldn't this allow me to end up with the same pot at retirement but having paid less for it?

So the intention isn't to avoid paying into my pension, but to do it more efficiently, with the added bonus of paying off expensive student debts more quickly.

Brynsam

rmc1664 wrote: »

My employer allows me to adjust my contribution, so I could choose to add much more once I'm in the 40% tax bracket. So wouldn't this allow me to end up with the same pot at retirement but having paid less for it?

So the intention isn't to avoid paying into my pension, but to do it more efficiently, with the added bonus of paying off expensive student debts more quickly.

If you opt out, will the employer give you backdated contributions for the whole period you were opted out, or have you lost those years of 'free money' and the potential growth on them?

Are you sure that the tax relief rules won't change between now and the time you become a higher rate taxpayer? Higher rate relief is always going to be a popular target with politicians...

Finally, if you opt out, do you miss out on any benefits such as life cover (it's often a higher multiple of pay for those in a pension scheme as opposed to those who choose not to be).

Haffertee

Because of compounding, small amounts paid in early could be more valuable than big amounts later on. Also I’d be surprised if your employer will let you defer the employer contributions you would have been able to get if you’d been contributing throughout. I suspect if you opt out for a period then they’re lost for good.

german_keeper

Apart from the good advice you will get and already are getting from knowledgeable people on here, do you have some sort of cast iron guarantee that your earnings are going to increase that much? What about redundancy, illness, disability, someone else getting the promotion, well anything really.

Do you want to take a chance that you will get to a certain age and think "oh blimey, I've got no pension I'm going to die with my boots on". Get your money in your pension, mate!

Afraid_of_Kittens

I paid into my Local Government Pensions for 25 years.

Now working in the private sector I pay into a NEST pension - put into a SHARIA fund - my pension pot grows by about £1000 every 16 weeks. A combination of my contributions, employer contributions and tax refunds and growth.

Don't opt out. Keep your pension - but find out where your money is invested - when you retire you will thank your past self.

Albermarle

Please let me know if this is a known trick, or if I've missed something important!

There is some sense in increasing your pension contributions as you get paid more .
Firstly because you can afford it and secondly to get HRT relief, which is a generous perk .
However as noted above you should at least keep contributing the minimum amount now, that will at least make sure you still get the maximum employer contribution.
Also it has already been noted that HRT relief might disappear at some point but another point is that you can only get HRT relief on HRT you actually pay .
For example if your earn £51K , you are a HRT taxpayer but you can only claim back the HRT on £1K .
So you probably need a salary getting on for £60K before you can start to make significant use of the relief. Are you confident to reach this level in the not too distant future ?

bostonerimus

rmc1664 wrote: »

Please let me know if this is a known trick, or if I've missed something important!

Thanks

Yes, you've missed the power of compounding.

LHW99

And if things go really bad, an illness with life expectancy less than a year is likely to allow withdrawal of all your pension (without doing it illegally), allowing you to at least live comfortably during that time.