A million people will opt-out of workplace pensions in 2019
Currently 10% of members opt-out of saving into a workplace pension and the government believes this number will leap to 21.7% in 2018 and 27.5% in 2019, once the scheme is fully rolled out.
Auto-enrolment has been successful in boosting the number of people saving into a retirement scheme but the contribution hikes in 2018 and 2019 are seen as significant obstacles.
Currently both an employee and employer pay 1% each, a 2% total contribution. From April 2018, auto-enrolment contributions rise to a total of 5%, made up of 2% from the employer and 3% from the employee. From April 2019, this jumps to 8% – 3% from the employer and 5% from the employee.
Someone with full-time average earnings will see their monthly contribution jump from £18 today to £92 in 2019.
Hargreaves Lansdown estimates that in total, including once self-employed and non-eligible workers are included, there will be around 13 million people outside of pension saving in 2019. Nathan Long, senior pension analyst at the group, said the shape of future long-term savings policy hinges on the behaviour of workers during in 2018 and 2019.
“Dropping out of saving for even short periods can seriously harm your retirement. Someone with average earnings who only opts out between the ages 22 to 25, could reduce their pension pot by £20,000 when they reach retirement.”
Further, he states that government workings point to soaring opt-out rates, although their models include assumptions formulated eight years ago.
“Out of date assumptions undermine any work in which they have been used. We know this includes calculations to assess the impact of fine tuning the auto-enrolment rules, but suspect they may also have been used in the review of pension tax relief. Underestimating the number of opt-outs would result in more money going into pensions and the government spending more on tax relief, the bill for which the Treasury would be forced to find from somewhere.”
Long said that plenty of employers would welcome a steer as to future opt-out rates in order to better understand the potential cost increases to their business. And given the increase in minimum contributions next April, further thought should be given to how to minimise opt-outs.
Hargreaves Lansdown suggests a number of measures which could lessen the impact of higher contributions:
- Timing of Personal Allowance increases – The government has committed to raising the personal allowance from £11,500 to £12,500 by 2020. Timing the increases to coincide with the contribution rises in April 2018 and 2019 will help offset the reduction in take home pay.
- Wait and see on further contribution rises – There have been calls to further increase the minimum contribution levels under auto-enrolment beyond 8% and to do so quickly. The high level of opt-out assumed by the government should dampen these calls.
- Compulsion – If large numbers of workers shun pensions, retirement saving could be made compulsory by removing the ability to opt-out. The current government is likely to have neither the appetite nor the ability to push through such radical reforms.
- Self-employed auto-enrolment – Currently only 1 in 10 self-employed workers save for retirement. Including this group in long-term saving needs to happen quickly.