You can choose to opt out of your workplace pension but are you going to?
If you are working and earn more than £10,000 a year then your employer must enrol you in their Workplace Pension.
You might think you are too young or have too many bills to pay to think about pensions right now.
The truth is the day you started your first full time job was the best time to think about a pension.
The second best time is today. See reason 3 below for why.
The Workplace Pension and auto-enrolment was brought in by the Government in 2012 to address the problem of too few people having any form of pension provision other than the state pension.
With the state pension now a flat rate of £164.35 (2018/19) you can see why additional pension provision is needed.
Can you retire and live comfortably on £164.35 a week?
What auto-enrolment means
Auto-enrolment means that you opt in to your workplace pension and you will pay 3% of your gross income every month into it (in 2018/19).
This rises to 5% in 2019/2020.
You should be able to view your pension online and change the funds you are invested in.
Most auto-enrollment workplace pensions have some choice of investments that you can research and choose from.
You do not have to remain with the default investment category. Indeed the default option is often not the best choice.
You might be saving for a mortgage, paying off student loans or just wanting to live a little, you know, YOLO.
But you will be 67/68 one day and you don’t want to look back with regret at decisions you made now just to save a few pounds.
Do your future self a favor, check out the reasons below.
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8 reasons NOT to opt out of your Workplace Pension
1. Free Money!
I can’t think of a better way to start off this list! Your employer must pay in at least 2% of your earnings into your workplace pension.
If you opt out that is a 2% pay rise you are turning down. From 2019 your employers contribution increases to 3%.
You could try asking your employer for the money instead but I doubt they’ll oblige.
2. You can’t rely on the Government
The state pension is now a flat rate of £164.35 (for 2018/19). If you have no other pension payment, can you really live comfortably on that each week?
Do you live on that now? If not, why do you plan on only that amount when you are older?
There are also no guarantees that the state pension will exist in its current form when you hit retirement age.
And what age will that be in the future? Changes in the last 10 years have included:
- increasing the retirement age from 60 to 68
- increasing the number of years you must pay in to receive the full state pension
- changing the amount you can receive as a state pension
- doing away with SERPS and the 2nd state pension
- introducing a flat rate state pension
Are you confident there won’t be further changes made between now and your retirement age?
3. Compound interest is your friend
Saving into a pension now whilst you are young will make a much, much bigger difference to your pension than if you start when you are 20 years older.
Compound interest is what is at work here.
As a rough guide, this is what happens (based on retirement age of 67):
If you are 22 and save £50 a month until state retirement age, you would pay a total of £27,000 into your pension.
You would receive approximately £1,000 per month from your pension in retirement.
If you wait until you are 40 to save £50 a month until state retirement age, you would pay a total of £16,200 into your pension.
You would receive approximately £250 per month from your pension in retirement.
Although as a 22 year old you end up paying £9,800 more into your pension, look how much more you get every month.
You make back your extra contributions in just one year. £1000 a month is doable for living costs.
Could you live on £250 a month?
If the state retirement pension is still around in its current form then £1000 a month on top of £164.35 per week would provide you with a decent retirement income.
4. It doesn’t cost as much as you think
Your pension contributions benefit from tax relief, for every £1 you pay into your pension pot you only actually pay 80p.
For example if you pay £50 into your pension, only £40 will be deducted from your pay packet. The Government will pay in the other £10.
So you see it really doesn’t cost you as much as you think.
Generally speaking, auto-enrollment is a no-brainer.
If you opt out of your workplace pension you are essentially refusing free money from both your employer and the Government.
5. You need a pension/money
A pension replaces the wages you receive from your job. If you are not working what will you live on?
See 2 above, you can’t afford to rely on the state pension being available to you when you retire.
What if you want to retire at 68 but the state pension age has increased to 75?
If you have your own pension you have choices. You can choose to take your pension at 68, before you get the state pension.
Without a pension you would need to continuing working until 75 – yikes!
6. You should be saving for your future self
If you don’t put money away for your future self, who will?
What conversations will your future self have with the current you when they are struggling to pay the bills because they only have the state retirement pension to live on?
Can you imagine the conversation your future self has with the today you?
So, why didn’t you put some money away for me? You only needed to put away £50 a month and I would have enough money to live on”
Oh, sorry about that, I haven’t thought about you/got plans for a new car/like my takeaways!”
Slightly tongue in cheek as I know plenty of people struggle with their budgets.
But your future self needs to be thought about. And not only when you hit 55 and retirement is just around the corner.
7. Tax free lump-sum when you retire
The Government made significant changes in April 2015 to your ability to access your pensions. Your choices include:
- Take up to 25% of your pension pot as a tax-free lump sum.
- Choose what to do with the remaining amount.
- Leave the balance invested (think compound interest, see 3 above).
- Convert it into a regular income (annuity).
- Alternatively you can drawdown further income from your pension pot monthly or yearly as you choose.
Related Reading: Budget By The Paycheck
How To Save For A Home While Renting
Ways To Plan For The Future With Your Finances
8. Protection From Bankruptcy
If you save into your pension but you go bankrupt in the future, then the money in your pension will be safe and cannot be used to pay off your debts.
If you had instead saved money for your retirement in ISAs, cash or stocks & shares, then these would be lost as part of your bankruptcy proceedings.
Your pension is protected and will still be there for you when you retire. That is reassuring.
8 excellent reasons not to opt out of your workplace pension
So, you have the option to opt out of your workplace pension but are you really going to? Every one of the reasons above is a strong argument to auto-enrol.
Added together they make a compelling case for you to be auto-enrolled from day 1 of your job.
The fact is, the more you save now, for your future self, the earlier you could retire and stop working. Think about that for a moment.
Whilst your colleagues are still hard at work doing their 9-5 x 5, you could be chill-axing, retired or semi-retired.
Got to be worth being enrolled don’t you think?
I’m taking part in the Monday Money linky with Lynn from Mrs Mummy Penny, Faith from Much More With Less and Emma from EmmaDrew.Info
Last Updated on 5th April 2023 by Emma
I agree, pensions are epic and everyone should have one and put in as much money as possible.
This is the one thing I have a tendency to lecture people on in real life, with reasonable success!
Snap! Although my success rate is variable depending on the audience. Civil servants are the worst for listening, probably because of their final salary pension. Which of course isn’t final salary any more, only career average since 2015.
I’d rather speak up and hope the drip feed effect works in time than not do so.
Thanks for popping over!
I have a friend who has no company pensions as she’s always opted out – yes, she’d even opted out of our final salary pension when we worked together, although granted, none of us were aware that it was a final salary scheme when we joined (I mean, who actually read the small print?). I’d stopped mentioning pensions to her until recently (a few drinks had loosened my tongue) and her reply was ‘why join the company pension when I’m not going to be there very long?’ I tried to explain that once paid into, the pension was hers to take with her and transfer to another scheme but I could tell that nothing would change her mind. I won’t give up on her though, just need to tread lightly and pick my moment!
That’s scary that she hasn’t got a pension still! I’ve got friends who are similar and they are on my perpetual reminder list.
I know the construction industry was really bad for pension arrangements and given many don’t/can’t keep working till late 60’s as its so physical it’s a real worry. Things are changing for those employed but the self employed are still a worry.
Pensions can be really overwhelming, so thank you for these great tips & explanations!
Hi Emma
Thank you for popping over – love your site!
I know so many people who shy away from pensions because they can get a bad press from the media. It’s often not the pension that’s the problem as that is just a wrapper, but the investments or more usually the investment manager. At least with the new workplace pensions you’re in it unless you actively opt out – a step in the right direction.
Great post!! I didnt enrole in my 20s, am now 41 and have 10 years of contributions, but missing another 10 years. Gutted. Thanks for joining #mondaymoney linky
Thanks Lynn!
Hindsight is a wonderful thing as they say, but every extra penny you pay into your pension now will benefit you. Its never too late to start increasing your contributions especially if you’re paying tax as the government will top you up by that extra 20%.
So many good reasons to pay into a pension. Do agree that it’s vital to save for retirement, if you ever actually want to stop working! I’m a big fan of free money from the tax man, on top of my pension contributions. Thanks a lot for taking part in #MondayMoney.
That’s a key message I wish we could emphasise more, that if you want to stop working you need to have money/pension/something! The state retirement pension, if it’s still around when a younger person retires, is not enough to live on, and do people really want to be working full time until they are 68 or older?
Thanks for stopping by Faith, lovely to see you here!
Agree! Agree! Agree! Pensions don’t exist as much here but never leave free money on the table, is what I say.
110 share! Go, you!! Noticed some layout changes. Nice.
Free money in these days of low inflation and minimal pay rises is a done deal for me.
Think this post resonated with a few people, either that or people’s Tailwind/Boardbooster automated systems like it! Layout is still work in progress, if only I knew code I could do the extra bits I want, I’ll get there eventually. X
Haha. I read the title of the post wrong and thought it was reasons to opt out rather than not to opt out!
I was ready to come in here all guns blazin… But no of course I agree with all of the points above. Bravo!
Alot of employers pay in more than mandatory as well. Mine is 4% / 8% . Great deal. Wephway from deliberate living gets something outrageous like 20% bump. Anyone turning that down should be put in a straight jacket immediately!
Cheers!
Ha! Glad you we are on the same side! That’s a good deal you have in this day and age and 20% is a fantastic bump! I think mine is probably similar in fairness as a UK civil servant although I now pay a whacking 5.45% up from 1.5% (that’s me being sarcastic BYW).