Can I opt out of the auto-enrolment contribution rate rise?
With the dawn of auto-enrolment in 2012, more than nine million people are now saving into a workplace pension.
Pre 6 April 2018, the minimum contribution rate was 1% from the employee and 1% from the employer, giving a 2% total contribution.
But as of 6 April onwards, the contribution rate has risen to 5%, made up of 3% from the employee and 2% from the employer, with the effects seen from this month’s pay packet. See YourMoney.com’s pension auto-enrolment guide for more information.
Concerns were raised that workers would be unable to afford the increase in contributions with many wondering whether they can – and whether they should – opt out of auto-enrolment.
Our Q&A below gives you the details…
Q) I’m auto-enrolled, can I remain on the lower contribution rate?
A) The increase to minimum contributions applies to all employers and staff who have been and will be automatically enrolled in the future.
The Pensions Regulator (TPR) says in some schemes, it may be possible for workers to pay in at a lower contribution rate than the statutory minimum. However, it adds this option isn’t widely available and neither schemes nor employers are permitted to “actively promote it”.
A spokesperson says: “Anyone who wants to contribute at a lower savings rate is effectively opting out of automatic-enrolment as they won’t be saving into a qualifying scheme.”
This essentially means that if you want to pay less than the statutory minimum, you won’t qualify under the auto-enrolment rules. However, TPR confirms that if an employer is prepared to contribute more as you contribute less (for example, you contribute 1% and your employer contributes 4%), then the statutory minimum 5% rate has been reached and is therefore a qualifying scheme.
Based on TPR data, it found 20% of employers paid some of their staff more than the minimum 1% rate pre 6 April 2018.
Q) Can I opt out of auto-enrolment?
A) Yes you can, only once you’ve been automatically enrolled in to the scheme; it’s within one calendar month (the opt out notice period) and as long as the decision has been taken “freely by the member of staff”.
This means payroll will stop deducting any further contributions straight away.
However, while technically you can’t opt out after the one month opt out period, TPR says after this time, employees can leave the scheme or cease membership of the scheme so contributions will stop.
Q) Will I get my contributions back if I opt out?
A) You will receive a full refund of any contributions made if you opt out within the one month notice period. If you no longer want to contribute after the one month opt out window has elapsed, TPR says you may be entitled to a refund of your contributions but this will ultimately depend on your pension scheme policy.
Q) Will I be automatically enrolled again after opting out?
A) If you’ve opted out, you’ll be automatically re-enrolled at the statutory minimum contribution rates around every three years.
TPR says: “Employers can choose their re-enrolment date which must fall three months either side of the third anniversary of the date their duties started.”
Q) The big question – should you opt out?
A) According to the Department for Work and Pensions (DWP), the current opt out rate stands at under 10% but TPR says both it and DWP will be monitoring the effect of the increase in minimum contributions.
It adds: “Auto-enrolment is a fantastic opportunity to start saving for later life. The recent joint advertising campaign with DWP encourages staff to think of their pension as something that is working for them. We want staff to get to know their pension and appreciate the benefit.”
Tom Selby, senior analyst at AJ Bell, says the rise in minimum total auto-enrolment contribution rates will clearly come as a shock to some – particularly those who receive little or no pay increase and so see their take-home pay cut as a result.
However, for those on an average salary, the increase will amount to less than £30 a month.
He says: “If you are struggling to make ends meet that could present a real problem. Anyone opting out of auto-enrolment or choosing to pay in at the lower level will lose the right to a matched employer contribution. This is the single biggest incentive to save in a workplace pension – think of it as a 100% bonus on the money you pay in. By opting out, you are effectively turning down free money.”
For those whose initial reaction is ‘I can’t afford the increased level of contributions’, Selby makes the following two points:
“Firstly, review all your other spending to see if you can cut back anywhere else. After all, for an average earner in the UK this year’s increase amounts to less than £1 a day – for many this will only require small lifestyle changes or even the renegotiation of an existing bill. As an example, it took me 30 minutes to cut my Sky bill by over £30 a month recently, so it can be done.
“Secondly, don’t just think about what you can afford now but what you want to be able to afford in the future. A pension is simply an incentivised vehicle to help you save enough money to fund the things you want to do in retirement.
“With the full flat-rate state pension paying about £165 a week in 2018/19 – just over £8,000 a year – and the age at which you receive it being constantly pushed back, anyone considering opting-out now needs to think what their life would be like living on this income (assuming they don’t want to keep working throughout retirement). And of course, there are no guarantees about what will happen to the state pension in the future.”
He adds that even when auto-enrolment contributions rise to a total of 8% of band earnings, after 40 years for an average earner this could be worth about £218,000.
“That might sound like a lot but today it will buy you a single-life inflation-linked annuity worth less than £8,000. For many a total retirement income of £16,000 a year will be well short of their aspirations – which is why auto-enrolment should be seen as a starting point for most people.”
The table below reveals the pension contribution totals following the contribution rises based on an average salary of £27,000 and for someone earning £45,000 (4% investment growth assumed post charges, per year):