Pension: Workers warned to think carefully before ‘throwing away’ valuable death benefits
With additional financial pressures in recent times, many Britons have considered opting out of workplace pension schemes to save money. A workplace pension is arranged by your employer to assist you in saving for your retirement. Under current regulations, the minimum your employer pays into your pension is three percent of your earnings.
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The minimum an employee is required to pay at present is five percent, bringing total minimum contributions to eight percent.
However, some have chosen to opt out of the workplace pension scheme because of present financial costs.
Employees have, however, been issued a stern warning by Steve Webb, a partner at pension consultant LCP to check opting out will not leave their family members financially worse off in the future.
Mr Webb discussed so-called ‘death benefits’ which can vary depending on personal pension arrangements, however, can prove vital later down the line.
He 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.”
Mr Webb has urged workers who fall into three main types of pensions to consider potential death benefits available.
The first category is the ‘final salary’ pension, sometimes known as the ‘defined benefit’ pension.
Mr Webb explained that in many cases, the family of someone who is an active member of this type of pension can receive a lump sum of three or four times the annual salary of the member upon their death.
Also available are ongoing survivor benefits which can also provide a substantial amount.
Mr Webb warned that for those who chose to leave the pension scheme, the payout could be significantly less.
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For example, under the ‘1995 section’ of the NHS pension scheme, the death benefit for a deferred member stands at three years of pension, as compared to the two years of pay for an active member of the scheme.
Also important to consider is the defined contribution occupational pension.
This pension is usually overseen by trustees and is viewed as a ‘pot of money’.
Traditionally, after the death of a pension member, heirs are entitled to the value of the accumulated pension fund.
However, family members can also receive lump sum death benefits which can be a multiple of annual salary.
Mr Webb warns the payout could be significantly less generous for those who have deferred, but says this can vary from scheme to scheme.
This scheme is particularly relevant for many public sector workers, who are considered at the greatest risk of losing their death benefits.
Finally, members of group personal pensions should also be vigilant concerning death benefits.
For this pension type, members are usually less concerned about death benefits, as active contribution to the pension is less important.
Mr Webb says workers should check whether or not their employer has set up a separate death benefits scheme, and whether this applies to them regardless of if they are an active member of their pension or not.
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