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  • Jaskarn Pawar

Young workers opting out of Workplace Pension could lose thousands of pounds


It’s understandable that young workers struggling with multiple financial commitments might be tempted to opt out of their pension. But research indicates taking a break from paying into a pension for even just a couple of years could mean losing out on thousands of pounds towards retirement.


Whilst it’s an issue that may not relate to you directly, it’s a decision that children or grandchildren may be contemplating. Choosing to leave a pension scheme without fully understanding the potential long-term impact could mean a retirement that is less financially secure.


Workplace Pensions and your contributions


Over the last few years, Workplace Pensions have changed enormously.


All employers must now offer a pension scheme for employers over the age of 22 and earning more than £10,000. As a result, millions of workers are saving into a pension for the first time.


Auto-enrolment means eligible workers will automatically be contributing to their pension at a minimum level. But should they choose to, they can opt out. Minimum contributions have gradually been rising. The last increase in April 2018, taking it to 5% of pensionable earnings. Coupled with minimum employer contributions of 3%, most employees will now be putting away at least 8% of their pensionable earnings into a pension scheme.


The financial impact of opting out


If you’re saving to purchase a first home, clear debt or start a family, it may be tempting to opt out of a pension scheme for a while to boost monthly income. However, it’s likely to have a much bigger impact than expected.


Research from Aegon looks at the potential losses of the total pension fund at State Pension age for a 25-year-old joining a Workplace Pension on an average graduate starting salary of £20,000. It found:


  • A one-year break would cost £7,300

  • This rises to £42,100 for a five-year break

  • And £91,600 for a decade long break


The sums could have a significant impact on security and what’s achievable in retirement. It’s easy for retirement to seem far off when first beginning work, but engaging with pensions earlier is important. There are four key reasons why halting even relatively small pension contributions can have such a profound affect:


  1. Tax relief: To encourage workers to contribute to a pension, the government uses tax relief as an incentive. This is linked to your usual rate of Income Tax. Tax relief effectively provides your pension with a ‘free money’ boost.

  2. Employer contributions: Employers must contribute 3% to your pension, though some may contribute higher amounts, often linked to your own deposits. However, when an employee opts out, this obligation ends. Again, it means opting out is effectively giving up ‘free money’.

  3. Investment returns: Most pensions will be invested. This gives all contributions a chance to grow over the long term. Investments do experience volatility and values may fall at points, however, historically, investing can help you make the most of savings.

  4. Compound growth: Usually, you can’t access a pension until you’re 55. So, investment gains are reinvested to deliver returns of their own. This is known as compound growth and over the long term can deliver significant growth to pensions.


Steven Cameron, Pensions Director of Aegon, said: “The recent rise in minimum contribution levels for auto-enrolment may mean some employees are contemplating taking a break from contributing into their Workplace Pension scheme. The temptation may be particularly strong for younger workers, many of which will be paying off student debt and saving for a house deposit. Competing demands for money short-term may mean saving for retirement decades into the future is pushed to the bottom of their financial concerns. However, opting out of your Workplace Pension should be avoided wherever possible.”


Considering the long-term effect


Before making a financial decision, including opting out of a Workplace Pension scheme, it’s important to weigh up what the long-term impact would be. In the case of halting pension contributions it can mean losing out on thousands of pounds and may mean retirement dreams aren’t realised. When you look at the bigger picture, you may decide that a sacrifice now is worth it when you look at the benefits you’ll reap further down the line.


We’re here to help you understand the short, medium and long-term consequences of a decision. In some cases, a focus on the short term is necessary, but, in most, a balanced approach that blends differing priorities and time frames is essential. If you’d like support, please get in touch.


Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.


Workplace pensions are regulated by The Pensions Regulator.