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Five questions to ask before quitting your pension

Paloma Kubiak
Written By:
Paloma Kubiak

Millions of people are saving into a pension for the first time as part of auto-enrolment. But with the cost-of-living crisis, many may look to cut their contributions or opt out altogether. Here are five questions to ask before taking the plunge.

Since its introduction in 2012, auto-enrolment has been hugely successful in kick-starting the retirement savings of millions of employees.

Harnessing the principle of inertia, over 10.6 million people have been auto enrolled into workplace pension schemes, with many saving in a pension for the first time. Encouragingly, the proportion of employees opting out of their pension scheme since its introduction has remained consistently low at around 10%.

While pension saving remained resilient during the pandemic, the growing cost-of-living crisis may put the brakes on the progress of auto-enrolment. Inflation is currently sitting at the highest rate since the early 1990s and forecasts show further price rises ahead.

Many employees are already feeling the squeeze on their income, and some may be looking to areas that can ease financial pressures. This may include reducing pensions contributions or opting out of their pension scheme entirely.

Opting out of a pensions scheme could have significant long-term consequences on your future finances, and it isn’t a decision to be taken lightly. It’s important to understand the consequences before taking action.

To help you understand these, here are five questions you should ask your employer before opting out of your workplace pension.

1) Will my employer still pay into my pension?

Employees receive valuable employer contributions on top of their own personal contributions when auto-enrolled into a pension scheme. The total statutory contribution is 8% of a band of earnings (between £6,240 and £50,270 a year) with employers paying at least 3%, and the balance, including pension tax relief, paid by employees. Many employers pay more than this.

If you opt-out of your workplace pension, it’s likely that you’ll lose your employer’s pension contribution. Forfeiting these valuable contributions effectively means you are giving yourself a pay cut as you lose out on ‘free’ money from the employer which can provide a significant boost to retirement savings.

Your employer is unlikely to increase your salary in lieu of their pension contribution, as this could be seen as coercion to opt-out.

2) Will I lose any other workplace benefits?

As well as losing valuable employer contributions, opting out could mean you lose other valuable benefits.

This includes tax relief paid by the Government on your personal pension contributions. Basic taxpayers receive 20% tax relief on personal contributions and higher rate taxpayers receive 40% tax relief. For a basic taxpayer, this means a £100 personal contribution is boosted to £125 after being topped up by tax relief.

For some companies, the pension scheme is also part of package which could include other benefits such as life cover. It’s possible that you could lose all or some of this benefit if you opt-out of your pension scheme.

In the event of your death, the value of your pension fund can be paid to your loved ones. However, if you hadn’t paid into the pension scheme, there will be no death benefits to pay out.

3) How is my take-home pay impacted?

There will be an immediate boost to your take home pay, but this is likely to be small compared to the long-term impact on your pension.

Between the loss of employer contribution and tax relief, an extra £10 in your pay packet today means £20 less going into your pension. Over time with compound investment growth, this really adds up.

4) Can I opt back in?

Yes, providing you meet the eligibility criteria you can opt back in to your workplace pension scheme at any time. Just tell your employer when you wish to do this. Once back in your workplace pension you will start paying pension contributions and so will your employer. But if you opt-out again within 12 months, it’ll be up to your employer whether to let you back in.

However, every three years employers have to re-enrol eligible employees who have previously opted out back into their workplace pension. This is known as the employer’s re-enrolment date. It may be less than three years from the date an employee opts-out.

5) Can I increase contributions to make up the gap?

If you decide to opt-out, it’s important that you think about filling in the gaps by increasing your pension contributions at a future date to help you achieve the retirement income you aspire to. The longer the gap in your workplace savings history the more challenging this will be.

For most, even the minimum contribution for auto-enrolment of 8% is unlikely to be enough to reach your goal.

Some employers will let you increase your pension contributions whenever you wish throughout the year. However, it’s more common for employers to limit this flexibility to just once a year, for example, during the flexible benefits window.

Plugging any gaps may seem daunting so it’s worth finding out if your employer will ‘match’ any additional contributions you make.

Kate Smith is head of pensions at Aegon