AJ Bell press comment – 17 August 2022
• Workers considering opting out of their pension scheme during the cost-of-living crisis should think carefully before jumping ship
• Around 1-in-10 people quit their workplace scheme at the moment, but many expect that to rise as inflation surges
• A 30-year-old who pauses contributions for 3 years could end up with a fund £25,000 smaller at state pension age, AJ Bell analysis shows*
• Those who feel they have no choice but to quit their workplace pension should have a plan to get back on the retirement savings horse as soon as possible
Tom Selby, head of retirement policy at AJ Bell, comments:
“With inflation ripping through the UK economy and households braced for another eye watering rise in energy bills in the Autumn, millions of people will be revisiting their budgets and looking for ways to save a bit of extra cash. Given the challenging nature of this backdrop, it is inevitable some will be considering cutting back pension contributions, or even stopping saving for retirement altogether.
“It’s important anyone considering going down this road is clear on what they are missing out on. If you opt out of your workplace pension scheme, you are essentially giving up your matched employer contribution – effectively a voluntary pay cut. Furthermore, you will miss out on the upfront boost provided by pension tax relief.
“If you opt out of your workplace pension scheme then your employer is required to re-enrol you after three years. However, the loss of compound growth means that three-year gap alone could result in your pension being £25,000 smaller at state pension age.”
Plugging the gap
“Over the long-term you’ll also need to think about how you plug the gap. Early contributions have the opportunity to benefit from compound growth over time – so by putting off saving today you’ll likely need to work harder to make up for lost time later on.
“You should also bear in mind that the minimum auto-enrolment contribution of 8% of band earnings will, in a lot of cases, fall well short of retirement expectations and many will need to save extra – either in their workplace scheme or via a private pension like a SIPP – in order to fund the lifestyle they want in later life. Of course, this won’t be possible for many people during a cost-of-living crisis.
“The key thing in all of this is to have a plan. If you really can’t afford to save for retirement today – and have combed through your weekly spending for alternative ways to save money – then make sure you keep revisiting your budget regularly. The earlier you get back into the savings habit, the easier it will be.”
*Assumes a 30-year-old on a salary of £30,000 with an existing pension pot of £25,000. Earnings rising by 2% per year thereafter, and investment growth of 4% per year after charges. Contributions are at the auto-enrolment minimum of 8% and based on current auto-enrolment earnings bands for the first three years, after which contributions are based on total salary. By age 68 the fund is worth around £330,485 versus around £355,438 if they had remained in the scheme throughout.
