Increasing numbers of workers are opting out of their workplace pensions to save money, but there are risks to be aware of.
All employees are automatically enrolled into workplace pension schemes if they are over the age of 22. But a “growing number” of Gen Z and millennials are choosing to opt out, “due to cost-of-living pressures”, said BBC News.
However, the over-60s are “consistently the highest rate of any age group” opting out, said Fidelity International, but this “may not be the right decision and could cost them dearly”.
The Week
Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.
SUBSCRIBE & SAVE
Sign up for The Week's Free Newsletters
Join more than 350,000 subscribers and keep yourself informed with a selection of The Week’s most interesting, enlightening and entertaining stories - plus daily puzzles.
Join more than 350,000 subscribers and keep yourself informed with a selection of The Week’s most interesting, enlightening and entertaining stories - plus daily puzzles.
Latest Videos FromThe Week US
Why people are opting out of workplace pensions
Saving for retirement is, of course, sensible but with a “cost-of-living crunch and compressed real wage growth ”younger workers are “prioritising having money in their pockets now”, said Investors’ Chronicle.
Some over-60s may also feel they have enough for retirement or have a health issue that reduces life expectancy, said Fidelity, so their priorities “may understandably change”.
How to opt out of your pension scheme
If you wish to opt out of your pension scheme, your employer will tell you the scheme you are enrolled in. To leave, you will need to contact the provider directly.
Businesses “must not actively encourage their staff to opt out”, said the Pensions Regulator, so it must be your own decision.
You can opt out within a month of being added to your employer’s scheme, and you will get back any contributions. Once you have been enrolled for a month, any contributions will usually stay in your pension fund until you retire.
Other options include reducing the level of your contributions, although there is a minimum of 5% of pay for employees and 3% for employers.
The benefits of opting out
The “main benefit” of opting out, said Legal & General, is getting your hands on extra cash. This can be useful if you have “new financial commitments, or changed your spending priorities”.
But while it can seem an “easy way” to pocket more money each month, said TPT Retirement Solutions, it can have a “surprisingly large impact” on the plans you have for your golden years.
The drawbacks of opting out
Opting out of a workplace pension is like giving up “free money”, said Armstrong Watson, as you lose employer contributions and government tax relief.
It is easy to underestimate the impact of “even a few years of missing pension contributions” though, said The Times, especially when you are young.
Your retirement is more likely to be comfortable “if you can save over the longest time possible”, said MoneyHelper.
You will miss out on potential investment growth if you opt out from your pension, which can slow down your savings, said Legal & General, which means “you might end up having to fill the gap by working for longer, later on in life”.
Opting out isn’t a “one-time decision” though, said LV, and you can usually rejoin your company’s workplace scheme. But this can be a “lengthy process” so you will miss out on any benefits and investment growth in the meantime.
