Question

Kevin is 53 years old and he has never been a member of a pension scheme. He gets a new job in a supermarket and he is automatically enrolled into a workplace pension. His gross earnings are £17,500. The pension scheme works on a defined-contribution basis; he pays in 5% of his earnings, which rises to 9% with tax relief and contributions from his employer.

At retirement, Kevin also expects to get a state pension worth £8700 (before tax) in today’s money.

Question:

Kevin is considering whether to opt-out of his automatically enrolled pension. Outline one reason explaining why he might want to do that and one disadvantage of such a decision

Answer 1

In the present case Kevin is aged 53 years, so he has 7 years with himself if we assume he retires at age of 60.

Total amount of contribution for pension schemes that will be received by him for 7 years will be:-

Defined contribution basis amount = 17500* 0.09*7 = 11025

(+) State pension amount = 8700

Total amount = 11025 + 8700 = 19725

Advantage :- As amount in pension fund will also be contributed by employer and there are some tax reliefs present, so his earnings get increased by 4%.

Disadvantage :- This amount will be taxable when the amount is received by him as per applicable tax laws in that jurisdiction. So, net amount which will accrue to him will be less than 19725.