Workers are being urged to think carefully about the valuable benefits they could be throwing away if they are considering ditching pension saving to ease the pressure on their finances.
With many employees facing wage cuts and added pressure on family finances due to the coronavirus crisis, some may be thinking about opting out of workplace pension saving.
But Sir Steve Webb, a former pensions minister who is now a partner at pension consultants LCP (Lane Clark & Peacock), said people should check carefully whether opting out will leave their family with less protection if they die.
He said death benefits vary considerably according to the type of pension, but in some cases – particularly in the public sector – opting out of the pension scheme can leave a worker with a much smaller lump sum payout for their family if they were to die.
Sir Steve said that, according to the latest Occupational Pension Schemes Survey, there are currently around 6.3 million public sector workers building up defined benefit (DB) pension rights, and the majority of these would see reduced death benefits if they were to opt out. There are also 1.1 million private sector workers building up similar rights.
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.”
Benefits will vary depending on individual pension arrangements. The main types of pension include:
– Salary-related defined benefit (DB) pensions, such as final salary schemes
Sir Steve said that, in many cases, the family of those who remain active members of a DB pension will receive a lump sum of three or four times annual salary in addition to ongoing survivor benefits if the member dies.
– Defined contribution (DC) pensions
Many employees have been placed in this type of pension under automatic enrolment.
Sir Steve said that, generally, when a scheme member dies, their heirs may be entitled to the value of the accumulated fund. But the family of active members may be entitled to a lump sum death benefit which will often be a multiple of annual salary.
– Group personal pensions and other DC workplace arrangements
In general, heirs may simply be entitled to the value of the pot whether or not the worker is actively contributing to the pension, but, in some cases, employers will have set up a separate death benefits scheme.
Sir Steve said workers should check that this applies to them regardless of whether or not they are a member of the workplace personal pension scheme.