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Retirement

The cost of opting out of your Workplace Pension.

Written by Emma Harrett on Nov 13th, 2023 Time to read: 7 minutes

Are you investing towards a more comfortable retirement with a Workplace Pension?

auto enrolment began in 2012, employers have been required to enter eligible employees into a Workplace Pension scheme.

The Workplace Pension offers one of the most convenient ways to invest for the future, as your employer sets the Pension up and contributes alongside your own monthly contribution. Alongside government tax relief this means your Workplace Pension is a simple and efficient way to invest towards the future.

This investment then has the opportunity to grow and benefit from compound growth over the long term. The premise is simple, over the course of your career, little and often contributions from your salary, when invested in a Workplace Pension, could grow towards a Pension pot that supports a comfortable retirement.

 

What is auto enrolment?

Auto enrolment is the mandatory process where employers must enrol their eligible employees into a Workplace Pension scheme.

Depending on your age and salary, this may happen automatically.

You’ll contribute a percentage of your salary and in most cases your employer will contribute too, alongside government tax relief. Combined, these three amounts become your Workplace Pension contribution and will begin to build your Pension pot.

 

Why was auto enrolment introduced?

The Government introduced auto enrolment to address concerns over how people could afford to retire in the future. For many people, the basic State Pension won’t be sufficient for a comfortable retirement.

Generally, auto enrolment can be considered a success. Since the schemes inception in 2012, over 10.6 million workers have been enrolled and total Workplace Pension contributions have risen in real terms, from £81.7 billion to £114.6 billion.[i]

 

Why would someone opt out of a Workplace Pension?

Despite the advantages of being enrolled into a Workplace Pension, some employees choose to opt out, with over a quarter of large businesses in the UK having reported an increase in the number of employees opting out of the company pension scheme.[ii]

One reason for this can be because the minimum age you can take money out of your Workplace Pension is 10 years below the State Pension age, meaning some choose to place their money elsewhere so they can access it sooner. Some people also don’t want the risks associated with investing over such a long period of time.

This may be costly in the long-term. While it also may feel like there’s a short-term gain by not contributing some of your salary, it may mean your future self has to work longer or retire less comfortably.

True Potential’s latest research indicates that 57,000 people may have opted out of an auto enrolled Pension in the past 12 months. Our research also highlighted that those choosing to opt-out have the equivalent of just £1.57 a day to live on in retirement if they live to 85.[iii]

Here’s why staying invested in your Workplace Pension may make sense.

1.Your employer will contribute towards your retirement

For some employees, being invested in a Workplace Pension can require your employer to contribute a percentage based on your earnings. Whether your employer contributes to your Pension or not depends on your age and earnings.

If you are eligible your employer is required to contribute at least 3%, and many employers will choose to contribute beyond this requirement. There are ale cases where your age and earnings mean you are not automatically enrolled into your company’s Workplace Pension, but you can choose to join, and your employer is obliged to contribute this minimum of 3%. It is important you speak to your employer to see if you qualify for this.

By opting out of your Workplace Pension it could cost you money that your employer would have paid towards your future. Over a career you could be missing out on thousands of pounds of employer contributions, and when you add on the potential compound growth over the long term, this could be a significant amount that could have funded years of retirement.

 

2.Tax efficiency

Depending on your circumstances you could also benefit from some forms of tax relief when you contribute to your Workplace Pension. This means the government will add money to your Workplace Pension, in addition to your contribution and employer contribution, if you are eligible.

The impact of this over a career could build significantly, it is in effect free money which would have likely been lost to tax if you’d have taken it as salary rather than a contribution to your Workplace Pension.

Think about it this way, the more you contribute of your salary, the less tax you will have to pay, as your Pension contributions will benefit from the tax relief. You are able to keep more of your hard-earned money.

Don’t think of your Workplace Pension as giving up money from your salary each month, think of it as adding money to your overall wealth and investing toward your future.

 

3.Long over short-term

It is understandable that some younger people may feel like that the now is more important than the future. Retirement can feel a long way off and you might feel like the minimum contribution of your salary is too much to part with.

However, stop and think carefully about the long-term cost of opting out of your Workplace Pension.

How much could those minimum contributions add up to over decades? Particularly for younger investors, they may be able to grow their money substantially over a forty-to-fifty-year period. Investing little and often over the long term is how big Pension pots are built up. Investing extra money closer to retirement isn’t as effective as the potential growth in small amounts contributed at the start of your career.

 

4.Can you afford not to invest in a Pension?

Ask yourself, if you opt out of your Workplace Pension now, how will you afford a comfortable retirement?

There are no guarantees that the State Pension will exist in the longer-term future, and if it is still around, it may not be worth very much. For example, even right now, if you’ve made the full 35 years of National Insurance contributions, the full State Pension is only worth £203.85 per week. Could you realistically live off this amount?

If you want to afford a more comfortable retirement, investing in your Workplace Pension, with the support of employer contributions and government tax relief could be a solution.

It may be worth increasing your Pension contributions if you are concerned about a comfortable retirement. True Potential’s research, based on our client database, suggests that an average auto enrolled investor risks being left £5,573.06 per year short of a comfortable retirement income if they were to retire at 66 and live until the age of 85. Increasing your Pension contributions may help you to avoid any shortfall.

 

5. A financial plan will help you navigate your future

If you really feel as if you need more money now, stop and consider how a financial plan could help to avoid the need of opting out of your Workplace Pension.

A good financial plan starts with a goal, which in the case of a Pension is typically a long-term goal of retirement.

To reach that goal you know you’ll need a disciplined approach of regular investment, with a set time period and assumed rate of growth in your Pension. You should put yourself in the best position be able to reach that goal if you stay disciplined over the long term.

To stay committed to the goal, set in place a budget that you’ll stick to. Where can you cut back in excess spending? Rethink the ways you are spending disposable income, could you make savings elsewhere?

In conclusion, opting out of a Workplace Pension could be costly in the long term, and may mean that your retirement isn’t as comfortable as you’d like it to be.

 

Benefits you may miss out on include:

  • Contributions your employer would make to your Pension pot.
  • Tax relief from the Government.
  • Potential growth and compound growth – which could add up to significant amounts if you are going to be invested in a Pension for decades to come.

 

Daniel Harrison, CEO of True Potential, commented:

“While we understand the financial challenges many households face, it’s crucial to recognize that Workplace Pensions play a pivotal role in achieving your retirement goals. We urge individuals to carefully consider the long-term impact of opting out before making such a decision. If you’re unsure of your options we encourage you to seek professional advice from our team of registered financial advisers in order to make informed choices that are the best for you. We’re just a phone call away.”

If you are in any doubt about what is right for you and your money, speak to a financial adviser today.

[iii] Someone opting out at the age of 41 (the average age of an auto-enrolled True Potential client), with an average sized pot of £2,441.57 would have just £10,901 to retire on once they reach the state pension age of 66 if they never opted back in, based on a growth rate of 6%. That’s equivalent to just £1.57 per day to live on in retirement if they lived until 85.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.

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