PUBLIC sector workers are being warned not to opt out of workplace pensions because of pressures on their finances.
In some pension schemes, especially those in the public sector, stopping contributions can end up with a much smaller lump sum being paid out on death.
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Many employees are facing lower wages at the moment because of the coronavirus.
Whether they have been put on furlough or their hours are cut, workers across the country are feeling the pressure on their finances.
But stopping pension payments could make a big difference to an overall savings pot.
Most pension schemes work by the employee and their employer paying in a certain amount of money each month to work towards their retirement income.
But some pensions also have other benefits attached to them, which would pay out a lump sum to those left behind if the policyholder was to die.
There are currently around 6.3 million public sector workers with one of these pensions and the majority would see reduced death benefits if they were to opt out, according to the Occupational Pension Schemes Survey.
There are also 1.1million private sector workers building up similar rights.
With these benefits, if the contributions have been stopped the value of the benefit falls significantly.
Steve Webb, the former pensions minister who is now a partner at the pension consultants Lane Clark & Peacock (LCP), is warning employees to “think carefully before ‘throwing away’ valuable death benefits”.
He has advised those thinking of stopping their contributions to check the wording of their pension policy.
This is because opting out can leave a worker with a much smaller payout for their family if they were to die.
The benefits available will depend on the pension therefore it’s worth checking the details thoroughly before making any changes.
THE THREE MAIN TYPES OF UK PENSION
There are three main types of pension in the UK, which we’ve explained here.
Final Salary known as a “Defined Benefit” Pensions
In most cases the family of those who have one of these pensions will receive a lump sum of three or four times their annual salary if the pension holder dies.
But if the contributions have been stopped the value of the sum may be considerably reduced.
Defined Contribution Occupational Pensions
When someone dies with one of these pensions, their family is usually entitled to the value of the fund.
If contributions were still being made before they died, the family will also be entitled to a lump sum death benefit which will often be a multiple of annual salary.
If contributions have stopped, the benefit is usually less.
Group Personal Pensions
Those left behind are usually entitled to the value of the pension pot whether or not the worker is actively contributing to the pension.
In some cases, employers will have set up a separate death benefits scheme, and workers should check that this applies to them regardless of whether or not they are a member of the workplace personal pension scheme.
Steve Webb said: “It is often not appreciated that as well as providing an income in retirement, membership of an occupational pension scheme can bring valuable death benefits.
“Although some help may be available for those who opt out, the most generous lump sum support for loved ones goes to those who are still actively contributing to their pension at time of death.
“Before making a decision to opt out of any type of workplace pension it is important to find out what death benefits you would be giving up’.
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