‘I’m approaching retirement, is it worth auto-enrolling?’
Auto-enrolment (AE) was first introduced in 2012, making it compulsory for employers to enrol eligible staff into a pension scheme. However, employees do have the right to opt out if they don’t want to contribute to a workplace pension.
Research from NOW: Pensions has revealed that people approaching retirement are three times more likely to opt out of AE than their younger counterparts.
Based on the workplace pension provider’s data from its 1.2 million members, it found that 22% of over 55s opted out of AE. In contrast, just 8% of members aged under 55 chose not to enrol.
For those aged 20-40, the opt-out rate in 2016 was even lower at 7%.
The benefits of auto-enrolment for older people
To be eligible for AE you need to be aged between 22 and State Pension age, and you need to earn at least £10,000 per year from a single job. A £5,876 ‘qualifying earnings’ figure also applies which relates to the minimum contributions which have to be paid. See YourMoney.com’s Not auto-enrolled yet? Five things you need to know for more information.
The minimum pension contribution under AE is currently 1% from the employer and 1% from the employee, meaning a 2% total contribution. This means someone earning the average salary of £27,000 per year will have pensionable earnings of £21,124 (£27,000 minus £5,876) so they pay £211.24 into their pension and their employer contributes £211.24 too, with the total annual contribution at £422.48.
With workplace pensions, employees receive tax relief as well as employer contributions. Taking a basic rate taxpayer, for every £800 invested, the government adds £200 to make a total of £1,000 in the pension scheme. However as the employer also contributes £1,000, this means a £2,000 pension pot only costs a basic rate taxpayer £800.
While the benefits accrue over the years, meaning someone starting at an earlier age should be left with a larger pension pot than someone starting later in life, Nathan Long, senior pension analyst at Hargreaves Lansdown says even a small monthly contribution can boost your pension pot when you decide to finish work.
“New pension rules mean you can cash out your pension when you are over 55. These changes mean older workers are actually committing their money for a much shorter period, something that may have been a turn off in their youth.”
He gives the following example to show how even a small contribution by an older worker can make a big difference later down the line:
A 50-year-old, earning £30,000 and saving 1% which is matched by their employer, would have amassed £9,890 in their pension by age 65. Tax relief (based on a basic rate taxpayer) means the cost to the member is only £3,600 (assumes a 1% charge and 5% return before charges).
In another example, NOW: Pensions compares pension earnings against possible savings accrued in a typical high street bank:
A 60-year-old earning £57,000 a year and saving 1% which is matched by the employer. After a year the pension contributions will have amounted to £1,140. As they’re over 60, they can take this out using the pension freedoms, and even after paying higher rate income tax they would have £798 cash. If they had opted out of the pension and put the money saved, after tax, into a bank or building society account, NOW: Pensions calculates they would have only £342.
When opting out may actually be the best course of action
If you’re enrolled into a workplace pension and have certain protection against the Lifetime Allowance – the maximum amount of pension savings you can build up without a tax charge (£1m) – then opting out could be a “smart move” as pension membership can invalidate it, according to Long.
However, he says that approaching the current lifetime limit of £1m, or contributing more than your annual allowance, doesn’t necessarily warrant opting out.
“Let’s assume a higher rate tax payer has pension assets of £1m already. They contribute £5,000 (although tax relief brings the cost down to £3,000). When factoring in matching employer contributions they have an additional £10,000 in their pension. Pension benefits above the lifetime allowance are taxed at 55%, so after this seemingly penal tax charge, they are left with a £4,500 benefit for a cost of only £3,000.”
He adds that if you are impacted, it’s wise to discuss your options with your employer.
Opted out previously and want in?
Under AE rules, you can only opt out once you’re enrolled. If you do this within the first month, you will usually get a refund of contributions.
Otherwise, every three years (based on the anniversary of the employer starting auto-enrolment) an employer must re-enrol eligible jobholders who’ve opted out. However you can opt back in at any time, but an employer can limit you opting back in only once a year. However, Long says that in practice, few employers put this restriction in place.
Why are so many over 55s opting out of auto-enrolment?
NOW: Pensions policy director, Adrian Boulding, believes pension providers have failed to communicate with older people effectively about the benefits of AE.
He says: “While they may think it makes sense not to have another pension scheme – perhaps they think they’ve saved enough, or perhaps they feel they can’t afford it – people who do this are effectively throwing money away by missing out on their employer’s contribution to their pension, and the government’s contribution in the form of tax relief.”
For Long there are a number of reasons why older people may be opting out of AE, but he notes that data around opt out rates need to be approached with caution.
He says: “A better focus is participation rate of eligible members, although this is not available. Prior to AE, members had to actively join their pension scheme, so rates would vary typically based on how proactive employers were in promoting their company pension.
“Historically, a far higher proportion of older workers chose to join their company pension. Younger workers were simply not interested in saving for retirement as it seemed so far away. Older workers were more inclined, the benefits being that bit more visible to them.”
Long gives the example below which shows the participation rate of each age group is the same (there are 100 workers in each age group of which 10 have opted out). As the opt-out rate is based on the rate of opt-out relative to those enrolled it appears that more older workers are outside of pension saving when they are not.
|Age||Total Workers||Already Members||Number Auto-Enrolled||Number Opted Out||Opt-Out Rate|
He adds that older workers often perceive AE as too little, too late.
“They wrongly assume the opportunity to actually make a difference to their retirement has passed them by. It is certainly true that the sooner you increase contributions to your pension the bigger your pot will be, however every little helps – especially when it comes to hoovering up valuable tax relief and employer contributions.”
Older workers are also more likely to have benefited from membership of a defined benefit pensions, so they may feel they already have adequate retirement savings.
Another reason suggested by Long is that older workers have also lived through pension scandals which may have turned them off saving for retirement.