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Pension opt-outs rise as inflation surges

Emma Lunn
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Emma Lunn

The proportion of savers opting out of their workplace pension has risen from 7.6% in January 2020 to 10.4% in August 2022, according to figures from the Department for Work and Pensions (DWP).

Auto-enrolment in workplace pensions started 10 years ago in October 2012. Since then, there have been real terms increases in total annual contributions for eligible savers in both the public and private sectors, for both male and female employees.

According to The Pensions Regulator, more than 10.7 million employees have been auto-enrolled. Minimum contributions started at 2% before being upped to 5%, and now stand at 8%.

But experts have raised concerns that the cost-of-living crisis could mean a surge in people opting out, with keeping people in the retirement saving habit likely to become a significant challenge as living costs rise.

Previously published AJ Bell research suggested a third of savers could quit their workplace pension scheme due to the cost-of-living crisis.

But more positively, recent data from 11 large auto-enrolment providers suggests since 2020 average employer and employee contributions have risen by 34.1% and 23.6% respectively.

This rise in contributions could be due to increases in retirement saving during lockdown and employers needing to attract and retain staff as labour markets tighten.

Total contributions into all private sector workplace pensions have increased from £41.5bn in 2012 to £62.3bn in 2021.

Tom Selby, head of retirement policy at AJ Bell, said: “Automatic enrolment has undoubtedly been successful in dramatically increasing both the amount of money saved in pensions and the number of people setting something aside for retirement.

“However, the 10-year anniversary of the reforms comes at the most difficult time for the finances of millions of Brits since they were introduced in 2012. Inflation for September was clocked at an eye-watering 10.1%, with energy bills set to spike over the winter and homeowners braced for surging mortgage costs as interest rates rise.

“In the face of this torrent of financial pressure, it is unsurprising auto-enrolment opt-outs have increased. Encouragingly, the figure remains relatively low at just over 10%, although our research suggests it could rise, with around a third of people having either already quit their workplace pension or considering doing so in response to rising living costs.”

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “Opt-out rates have always been low but have crept up over the past year or so. This is likely because of the difficulties experienced during the pandemic and the current cost-of-living crisis. There are no signs of these pressures abating as inflation continues to soar and so care needs to be taken to mitigate further opt outs.”