We’d like to think that, once enrolled into a pension, everyone who is eligible, will remain in the scheme. After all, it’s a low-effort way to save money for retirement and take advantage of the benefits that they come with, such as employer contributions and tax relief.
People in the north of England are the most likely to stop contributing to their Workplace Pension.
According to research from NOW Pensions, 8.2% of people in Cumbria are considering opting out of their Workplace Pension, compared to 3.2% in Northamptonshire and 3.5% in Bedfordshire.
Those who do want to opt out cite a range of reasons for it, let’s look at three and why they should reconsider:
1. “I can’t afford to make contributions”
This is possibly the only reason for thinking about opting out that may have any merit. However, it is possible that you are overestimating just how much you will be putting away each month.
Contributions may be calculated based on an employee’s full salary, or qualifying earnings. These are the annual earnings within a particular band. For the 2018/19 tax year, this band is £6,032 to £46,350. That means contributions are not made on the value of earnings below the lower threshold or above the higher limit.
Based on the 2018/19 minimum contributions of 2% employer and 3% employee, the monthly contribution for a 22-year-old earning the minimum salary for automatic enrolment, of £10,001, is £7.96. In addition, an employer contribution of £6.62 and tax relief of £1.98 means that a total of £16.54 will be put into the pension each month.
From April 2019, when the minimum contributions increase to 5% employee and 3% employer, the total amount for each month will rise to £26.46, which includes employee contribution of £13.23, tax relief of £3.31 and employer contribution of £9.92.
By comparison, someone earning the national average full-time wage of £26,832, will have a total monthly contribution of £86.67, this includes:
- £34.67 employer contribution
- £41.60 employee contribution
- £10.40 tax relief
This will increase to £138.67 in total after April 2019, when the employer will contribute £52 and the employee £69.43 with £17.33 tax relief.
(Calculated using the Money Advice Service Workplace Pension Contributions Calculator)
While that is not going to lead to a huge retirement fund, it will go some way toward boosting your income when you leave work. At less than £10 per month, it is likely that you can factor it into your budget without making too many compromises.
2. “I don’t need to worry about my pension yet”
Being young doesn’t mean that you are excused from planning for the future. In fact, the earlier you begin putting money to one side, the better off you are likely to be when you reach retirement age, and the less stress you will face when retirement planning becomes a real priority as you get older.
To put it another way, the earlier you start saving, the more ‘free money’ you will pick up, from employer contributions and tax relief, and the more time your fund will be able to grow.
There are a range of online calculators which allow you to see how your retirement fund will differ, depending on how many years you make contributions for. Alternatively, talk to us to get predictions about your retirement income and tips for improving it.
3. “I don’t trust pensions.”
This is broadly a generational issue. We recognise that there are people who have had a bad experience with pension providers, or who have not seen the results they had hoped for. Many of those have passed their opinions onto their children and grandchildren, who continue to shy away from investing in their retirement, despite having no real context for their reasoning.
All investments carry risk, but the retirement landscape has been revolutionised over recent years due to Pension Freedoms and Automatic Enrolment, which has made pensions much more attractive to both those who have retired, and those still in the planning phase.
For example, the recently-introduced Pension Freedom reforms mean that pension funds can now be accessed from the age of 55 with much more flexibility than before. Where retirees have previously had a cap on the amount they could withdraw from their pension, these reforms mean that there are now more options around how retirement income is structured.
The main reason for staying in your Workplace Pension
‘Free money’. Yes really.
The contributions made by your employer comes out of the company’s pocket, not your salary.
So, if it feels like you are giving up your hard-earned cash for several years, just remember that when you access it, you will not only be receiving your own contributions back, but also money from your old employer and tax relief, without having to do any extra work.
Additionally, you are not sacrificing any money permanently. Pension contributions are not a bill or a tax, simply a way to make sure that you have enough income when you leave work.
Amy Mankelow, Director of Communications at NOW: Pensions said: “With so many competing financial pressures, pension saving can be difficult. But, with auto-enrolment, when you pay in, your employer pays in too. If you opt out, you will miss out on that ‘free money’ from your employer, so it pays to stay in if you possibly can.
“It’s also important to remember that the sooner you start paying in, the easier it will be to build a healthy pension pot for the future.”
What to do next
If you aren’t a member of Workplace Pension… join one.
If you are already enrolled… stay there.
And, if possible, consider increasing the amount you contribute each month if you can afford to put more away, because minimum contributions won’t be enough to retire.
And, there’s nothing stopping you from asking your employer to match them. The worst they can say is no.
If your annual monthly or weekly earnings are below the threshold for automatic enrolment, which are:
- £10,000 per year
- £192 per week
- £384 per two weeks
- £768 per four weeks
- £833 per month
- £2,499 per quarter
- £4,998 per half year
Then you may be able to join your company’s Workplace Pension voluntarily. This will mean that both you and your employer will make contributions based on your income, and you will receive tax relief on the amounts you put in.
To review your pension planning, feel free to get in touch with us.
