Is opting out of a workplace pension a false economy?

Rachel is a 35-year-old charity administrator. When she started her current job nearly six years ago, she was automatically enrolled into her workplace pension. Auto-enrolment for workplace pensions was introduced in the UK to encourage more people to save for retirement. It means employers have to enrol into a pension any workers who are:

• Not already in a pension
• Between the ages of 22 and the state pension age
• Earning more than £10,000 a year
• Working in the UK

Rachel was happy to be enrolled into her workplace pension when she joined the charity but, now the cost of living crisis is starting to bite, she’s considering opting out in order to maximise her take-home pay. So, would this be a wise move or a false economy?

What will Rachel get out of her workplace pension?

In 2019, the government increased the minimum contribution to workplace pensions to 8% - at least 3% from employers with employees making up the balance. It’s important for Rachel to remember that her contribution comes from her pre-tax earnings, so opting out of her workplace pension may not boost her take-home pay as much as she expects.

The government is also contributing to Rachel’s workplace pension in the form of tax relief. As a basic-rate taxpayer, Rachel only needs to pay in £80 to increase her pension savings to £100 because the taxman contributes £20.

So effectively, Rachel is contributing 4% of her qualifying earnings (any pre-tax employment income between £6,396 and £50,270) to her workplace pension. The government then adds 1% tax relief and the charity tops this up with a 3% contribution. This means, in effect, Rachel’s net contribution is being doubled. In other words, for every £100 Rachel contributes, £200 is landing in her pension pot.

But does Rachel really need another pension on top of her state pension?

The short answer to this is yes! Many people overestimate how much they’ll get from their state pension. Currently, a full state pension provides an annual income of just over £9,600. Rachel will definitely get a proportion of this, as she’s already made ten years’ worth of National Insurance contributions. However, to get the full amount, she’ll need to make 35 years’ worth of contributions. Even if she manages this, according to Which, a single person needs £19,000 a year to enjoy a comfortable retirement and closer to £31,000 a year to be able to afford luxuries like exotic holidays and a new car every five years.

Why should Rachel get advice?

With costs rising left, right and centre, it’s understandable that Rachel wants to make savings wherever she can. However, by opting out of her workplace pension, she would essentially be throwing away free money from her employer and the Government. If possible, it would make sense for her to continue paying into her workplace pension while looking to make savings elsewhere.

Probably the best thing Rachel can do is seek advice from a professional. They’ll be able to explore options that allow her to enjoy the best possible standard of living both now and in the future.

If you’d like to discuss pension planning or any aspect of your finances, we’re here to help.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

Key takeaways:

• A workplace pension helps you to boost your retirement savings with contributions from your employer and the government.
• The state pension alone is unlikely to be sufficient to fund your retirement.
• Get professional advice to make sure you get the retirement you deserve.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.