- Over 55s are three times more likely to opt out of auto enrolment than their younger counterparts, even though they could double their money
- People that opt out are missing out on their employer’s contribution as well as the tax relief
- Someone earning the average UK wage could be missing out on up to £422 per year if they opt out
Over the past year NOW: Pensions has found that people approaching retirement are three times more likely to opt out of auto enrolment (AE) than their younger counterparts. The over 55s opt-out rate is 22% amongst NOW: Pensions’ members, compared to the only 8% for people under 55. The rate for ages 20-40 is even lower (7%).
NOW: Pensions’ policy director Adrian Boulding believes pension providers and employers have failed to communicate with older people effectively about the benefits of AE. “Whilst they may think that it makes sense not to have another pension scheme – perhaps they think they’ve saved enough, or perhaps they feel they can’t afford it – people who do this are effectively throwing money away by missing out on their employer’s contribution to their pension, and the government’s contribution in the form of tax relief”, Boulding said.
NOW: Pensions gives examples of how people are losing out:
- Rav is aged 57 and earns the average UK wage of £27,000. He currently pays the auto enrolment minimum of 1% of his salary above £5,876 into his pension scheme as does his employer, a total of 2% or £422 over a year. But if he had saved in a bank or building society instead of a pension, he would have missed out on both tax relief and the employer contribution, meaning that only £169 would be in his savings account. And because he is over 55, he can exercise his pension freedom and, assuming he is a basic rate taxpayer and eligible for a quarter of his pension tax free, he could withdraw £359 cash, after tax, from his pension.
- Jane is 60 and earns a salary of £57,000 a year. Her employer is re-enrolling her into a scheme where employee and employer both pay 1% of her full salary. After a year the pension contributions will have amounted to £1,140. As she is over 60 she can take this out using the pension freedoms, and even after paying higher rate income tax she would have £798 cash. But if she had opted out of the pension and put the money she saved, after tax, into a Bank or Building Society account she would have only £342.
Adrian Boulding concludes: “Whilst some people who are near the lifetime limit do need to opt out, if you are not in that situation then it just doesn’t make sense to opt out – especially at older ages! These examples show that you could more than double your money by putting it into a pension.”
Notes to editors
Opt-out rates quoted are the actual opt out rates from across NOW: Pensions’ entire portfolio of 1.2million members during 2016. In the examples above we have ignored the very small amount of interest that the money in either a savings account or a pension could have earned during the year.
Employers are under a statutory duty to automatically enrol eligible staff into a qualifying workplace pension from the date their duties come into effect, and thereafter when new employers join. After every three years they must then re-enrol the eligible staff that opted out last time or have ceased to be members of the scheme.